How do you assess leverage capacity for a target?The leverage is the amount of debt in a company.

When you decide to assess the leverage capacity of a company, you want to know the maximum leverage of the company.

When you want to assess a maximum leverage you need to make sure that the company can repay 1) interest expense and 2) the principal.

To do so, it is important to look at cash flow before debt service, its evolution and sensitivity to different parameters (sales growth, costs evolution etc…). This cash flow will have to be sufficient to 1) pay interest, 2) pay principal and 3) gives some headroom to allow the company to grow or face bad situations.

You can back-calculate the maximum leverage by taking the amount you can afford to give up to the debt holder.

To assess maximum leverage, you need to also look at the market: are companies in this sector very levered? Are banks landing money to this type of companies?

To assess leverage for a target, the financial sponsor need to be sure that the company can repay the debt quickly and gives space for equity value creation! If you have too much debt, equity value might get to 0 if things go badly!

What are the advantages of using Mezzanine debt from the company’s point of view? Increased leverage  Might offer lower cost of capital (since cheaper than equity) with less equity dilution Interest paid on Mezzanine debt is tax deductible where dividends are not Senior creditors benefit from the cushion of the junior debt  Debt under mezzanine arrangements is often payable after certain years (PIK

interest), delaying obligation to buyer

If a company trading at 8x P/E buys a company at 4x P/E in an all stock deal, is the transaction most likely accretive or dilutive?Accretive. Generally when a company with a higher multiple acquires a company with a lower multiple, the transaction is accretive. This is true because the acquirer is paying less for every pound of earnings than the market is currently valuing.

You have a 10% note with a maturity in five years trading at 80. What is the current yield?Here, Par value is 100 so you lost 20 cents on the dollar (100-80). That twenty cents is divided by five since you still have five years left on the investment (20/5=4). So the current yield on the note is 14% (10+4=14).

What are the characteristics of a good LBO candidate?You will find below some characteristics of a good LBO candidate: Strong competitive advantages and market position High barriers to entry Steady and predictable cash flow Defensible / strong market positions Strong management team Minimal future capital requirements Potential for operationnal restructuring Large amount of tangible assets for loan collateral Clear exit route

Why do you want to explore a career in Private Equity? Better understand companies from an operational prospective

Become actual investors (should be shown as a passion)

What are the exit routes for a Private Equity investment? Which one usually gives the higher valuation?Secondary LBO

A financial sponsor can often sell a portfolio company to another financial sponsor in a leveraged buyout transaction known as a secondary buyout. This name derives from the fact that the LBO is being sold to the next buyer in another, separate LBO.

One possible rationale for this type of exit can be that the financial sponsor and current management team believe a larger financial sponsor can add value to the portfolio company as it moves into the next stage of its development. Alternatively, a financial sponsor may decide to sell the company to another financial sponsor if it has reached its minimum investment time period and has already created a high rate of return on its initial investment. Other potential benefits of selling to another PE firm include increased flexibility in the structure of the sale (where, for example, the seller could potentially maintain a partial ownership stake and enable the company to continue conducting its business with the intent of growth in the long term).

However, a financial sponsor is almost always a sophisticated buyer, and thus will try to purchase the asset at a minimal valuation, typically at a much lower price than would a strategic buyer. In addition, the attainable sale price could be highly dependent upon debt market conditions.

IPO

The primary benefit of an IPO exit for a portfolio company is the potential for a high valuation, provided that there is investor demand for equity in the company and stable, favorable public market conditions. That being said, an IPO involves high transaction costs. Additionally, if the financial sponsor is looking to fully exit the portfolio company, potential public investors might view a full exit as a lack of confidence in the future prospects of the business. Furthermore, the terms of the IPO may prohibit the financial sponsor from exiting some or all of its position for a period of time (called a “lock-up” period). Other potential problems with an IPO exit include the risk of the quality of the

overall public equity market environment, and the likelihood of a discounted price for the IPO. (An IPO generally is priced at a discount to the expected trading price of the stock once the IPO is completed—typically about 15%-20% of the equity’s expected market value. This discount is designed to help drum up demand for the new issuance, but it results in value left on the table by the issuer of the IPO, which directly impacts the achievable value for the PE firm’s equity holders.)

Trade sale

A financial sponsor may realize gains in a portfolio company investment via a sale to a strategic acquirer. This allows for an immediate liquidity event for the financial sponsor. Strategic buyers typically intend to hold the acquisition over the long-term and thereby gain a greater competitive advantage and market share in its respective industry. A strategic buyer is usually a non-PE firm, and the acquisition is in the buyer’s strategic interest (whether it’s for market growth, trade secrets, new products, synergies, or other business improvements). Therefore the trade sale will usually command the highest sale price. For these reasons, the sale to a strategic buyer is generally the preferred exit option for an LBO investor.

Do you know what is the rule of 72?The rule of 72 allows you to estimate compounded growth rates.

Estimated CAGR = 72/years to Double Money

Walk me through a LBO analysis1. Build operating model

Build the operating model for the target company. The most important financial aggregates will be the ones which will allow you to calculate a detailed cash flow before debt service (payments of debt principal and interests). The LBO transaction implies a completely new capital structure (more debt and more diverse tranches of debt). You will want to know if the company can support the new cap structure!

2. Valuation

Once you have the key financials, you need to know how the company is worth. Here it’s a usual valuation exercise: comps (precedent transactions and trading comps) and DCF.

3. Sources and uses

When you know how much the company is worth, you need to know how much the financial sponsor will pay for it in total: don’t forget transaction costs – it’s not free to raise debt and you will have to pay advisors (legal, financial etc..).

This step requires to think about the structure of the transaction: how much debt can you put in the transaction? What type of debt? And ultimately, what is the equity check (what the PE shop will have to put on the table)?You will be able to answer these questions by looking at recent transactions in the same sector, by judging the appetite of banks in financing the asset etc…

4. New capital structure, new set of forecasts

When you have your new capital structure, you can then modify the operating model of the company: new interests to be paid, new type of debt to be repaid.The forecasts will start from what is called “pro-forma” financial (pro-forma for the transaction).

5. Credit statistics

Once you have your new set of forecasts, it is very important to know if it works! By “it works”, we mean “can the company support the heavy amount of debt?”. Credit statistics are some of the most important measures in a LBO, you will calculate ratio such as leverage or interest cover ratio in order to see 1) if the company can repay the debt and 2) if the company can repay the debt quickly. If the company can’t support the capital structure you set up, you have to modify it (lower the debt, use other debt instruments – loan, PIK note, high yield bonds etc…).

6. Returns

When you have your sustainable capital structure, you need to calculate the returns for the financial sponsor. 2 key measure of return: 1) Cash on cash (“CoC” multiple) – you invested £100 and you get back £200 when you liquidate your investment, you made a

2.0x CoC – and 2) Internal rate of return (“IRR”) which a value of return in percentage and taking into account the factor time.

Bear in mind that expected returns vary in function of the type of financial investor. A pension fund will expect a 10%-14% IRR while a Venture Capital firm will expect at least 30%-40%.

How do you generate returns? How can you improve returns?How do you generate returns? Free Cash Flow generation and debt paydown Tax shield Operationnal improvement (EBITDAgrowth and margins improvement) Mutiple expansionHow to improve returns? Lower purchase price Increase exit multiple Increase the leverage used Improve margins Improve key aggregate (EBITDA)

Do you know what is a PIK loan? Why would you use it?PIK loan stands for payment in kind and means that in certain circumstances, rather than pay a coupon in cash, the coupon will be paid in the form of new bonds which are added to the total amount to be repaid in cash at maturity.

From the company’s point of view, the advantages of using  PIK loan are as follow:

Increased leverage Interest paid on PIK loan is tax deductible

Debt under mezzanine arrangements is often payable after certain years (PIK interest), delaying obligation to buyer

 

How do you assess leverage capacity for a target?The leverage is the amount of debt in a company.

When you decide to assess the leverage capacity of a company, you want to know the maximum leverage of the company.

When you want to assess a maximum leverage you need to make sure that the company can repay 1) interest expense and 2) the principal.

To do so, it is important to look at cash flow before debt service, its evolution and sensitivity to different parameters (sales growth, costs evolution etc…). This cash flow will have to be sufficient to 1) pay interest, 2) pay principal and 3) gives some headroom to allow the company to grow or face bad situations.

You can back-calculate the maximum leverage by taking the amount you can afford to give up to the debt holder.

To assess maximum leverage, you need to also look at the market: are companies in this sector very levered? Are banks landing money to this type of companies?

To assess leverage for a target, the financial sponsor need to be sure that the company can repay the debt quickly and gives space for equity value creation! If you have too much debt, equity value might get to 0 if things go badly!

How’s the debt market currently doing? What is the current pricing for a TLA? TLB?For this one, it really fluctuates depending on the market. To answer the question “how is the debt market currently doing?”, you need to have a look at current government

bonds, do you have countries in distressed? Do banks land money at the moment for levered transactions (LBOs), is the debt market closed or open?

Unfortunately, we can’t give you a straight answer as it will probably change! Have a look on mergermarket or in the press and you may find some answers!

What is the formula of the IRR?Assuming that no dividend are paid through the period and do dividend recap:

IRR = [(Equity Value at Exit)/(Equity Value at Entry)]^(1/# of years of the investment) – 1

Please walk me through a Sources & Uses table?Sources of funds: debt and equityUses of funds: current debt paydown, paying equity holders, transaction fees etc.

Sum of Sources = Sum of Uses

Looking at returns what kind of sensitivity tables would you show?After most analysis, sensitivities are built to test the outputs. In a LBO analysis, the outputs are the returns (CoC and IRR).

Returns are tested in function of:

Time: it is important to see what the impact is if the participation is sold 3 years after acquisition or 6 years afterTransaction multiples: what happen if exit multiple are lower, equal or higher than the acquisition multiple? What can we afford in term of entry valuation?Operations: this will depend on the asset. Some companies may be extremely seasonal and will show strong swings in working capital (it will be important to stress this vs.

return) or the investor may be worried about fluctuation in certain raw materials prices (what happen to the returns if prices increase by 10%?) etc…

What are the key points to focus on during a due diligence process?COMMERCIAL DUE DILIGENCE PROCESSCOMPETITIVE LANDSCAPE AND MARKET POSITION

What is your competitive advantage?

Product offering Technology Premium brand Distribution capabilities Geographic presence Disruptive business model

What are the barriers to entry into the business?What are the costs of switching to a competitor’s product?Where does the company fit in the industry value chain?How has the industry changed over the last 5 years?How do you expect that to change over the next 5 years?Who are your main competitors?From whom have you been gaining/losing market share?What firm is the biggest threat to your company?What is the biggest share gain opportunity?What is the market landscape (fragmented market etc.)? How saturated is the market?

INDUSTRY GROWTH / ADDRESSABLE MARKET

Growth of the market (historical and forecast)? Is the industry mature?Total addressable market? Any segment of the industry growing faster than others?

Key macroeconomic drivers of the business. Trends?

Have there been any significant changes to the industry landscape (e.g. disruptive new entrants, consolidation, vertical/horizontal integration, demand/supply imbalance, etc.)?

What are the regulatory concerns and how can it adversely affect the business?

CUSTOMER BASE / SUPPLIERS

# of customers? Sales generated by the top 30 customers?

Length of a customer relationship? What is a typical renewal rate?

Key decision makers for the customers? Buying dynamics? Length sales process?

# of suppliers? Supplier bargaining power?

Can price increases from the suppliers passed through to the customers? 

 

CAPITAL REQUIREMENTS OF THE BUSINESS

Is the business capital intensive? What percentage of capital expenditures is growth capital vs. maintenance Capex?

Fixed vs. variable costs?

Minimum cash requirement?

 

FINANCIAL DUE DILIGENCE PROCESS

QUALITY OF EARNINGSDEBT AND DEBT-LIKE ITEMSNORMAL WORKING LEVEL OF CAPITALTAX STRUCTURE

LEGAL DUE DILIGENCE PROCESS CORPORATE FILINGSPROPERTY, PLANT AND EQUIPMENTLAWSUITS / LITIGATION / PATENTSENVIRONMENTAL

Do you know what is operating leverage?Operating leverage is related to the composition of the cost structure: fixed costs vs. variable costs. In other words, it is a measure of how revenue growth translate into operating income (EBIT) growth.

High operating leverage

It means the company’s cost base has a strong proportion of fixed costs. If Revenue increase, it will less and less be “used” to cover the costs and more and more dedicated to cover the operating profit and generate more margin.

Low operating leverage

The company’s cost base has a low proportion of fixed costs and a high proportion of variable costs. If sales increase, margin growth will not be as high as in the case of a company with high operating leverage.

Based on the information memorandum you received from the sell-side adviser the IRR given by your LBO model is c. 15%. What can you say?First an information memorandum is a 50-to-100 page book on the company to be sold. You will find in it financial information (historical and forecast), market overview, strategy, management team etc…

If it come from the sell-side advisor, it’s a marketing document, so it will be fairly “optimist” in term of projections.

Let’s consider you are a regular private equity firm, you will target roughly 20%-25% IRR. So if, with very optimistic number you get a 15% IRR in your model, it probably means the investment would not work for your investor profile.

You can ask additional questions to the seller to clarify the situation (as you don’t make investment base on excel), but you would probably exit the process or bid very low (as other buyers could have the same approach).

Do you know what a cash sweep is?A cash sweep is the use of excess free cash flow to repay debt. It means that there is no “fix” planned repayments for the debt, instead, whenever the company generates an excess in cash (above an agreed threshold), this excess cash is used to repay the debt.

Do you know what a RCF is?A Revolving Credit Facility (“RCF”) is a line of credit where the Company pays a commitment fee and is then allow to draw on the facility whenever it has a need (generally operating need).

It means that the Company will pay a fee, to be able to borrow money (the amount is capped) whenever it wants, to finance particular swing in working capital or other operating needs. When the Company draws on the RCF (for example £20m out of a £50m RCF), it will pay interest on the drawn amount and will continue paying the commitment fee on the undrawn amount (£30m).

The company repays the drawn amount whenever it can (as it is the most expensive part of the RCF, vs. undrawn amount).

What are the key value drivers of an LBO?A leveraged buyout (LBO) is an acquisition which is heavily financed by debt. It means the acquisition will require less equity contribution (the “equity check”).

LBO are usually structured by financial sponsors which can play with 3 main leverage or value drivers (time is a strong factor in LBO transaction, so the faster you generate value, the better):

Financial leverage

As mentioned, the transaction is heavily levered. The main assumption is that the acquired company will be able to repay the debt along the holding period. If the debt is repaid and the EV of the company remains constant, the transaction generates value for the equity holder:

Operating leverage

If the company grows and expand during the holding period, it will generate value for the equity holder. If the company was acquired when it had an EBITDA of £10m and sold with an EBITDA of £15m and everything else remains equal, equity holders are winners:

Multiple expansion

If the acquired company is in a sector which is not particularly popular, acquisition multiples may be low. If 5 years after acquisition the sector became hot, acquisition multiples may be higher:

What is usually more expensive? Bank debt or High Yield debt?Usually bank debt is cheaper than high yield debt. It will be cheaper because less risky than high yield debt (“junk bonds”). Bank debt will be more senior so in case of liquidation, banks will receive the money first. In addition, bank debt will be more likely to be secure against the company assets.

Sector Wise Analysis

1.) Investment & Finance Sector Analysis ReportThe major Non Banking Financial Companies (NBFCs) in India have their relative specializations, for e.g. HDFC (mortgage loans), IDFC (infrastructure loans), Mahindra Finance, Power Finance Corporation (power financer) & Shriram Transport Finance (auto loans). The trend of segmental monopoly is changing as banks are entering long-term finance and FIs also meeting the medium and short - term needs of the business masses 

Today, NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. NBFCs have emerged as key financial intermediaries particularly for small-scale and retail sectors. With easier sanction procedures, flexibility, low operating cost and focus on core business activity, NBFCs stand on a surer footing vis-a-vis banks. Therefore, the credit needs of customers are met adequately. 

NBFCs' growth had been constrained due to lack of adequate capital. Going forward, we believe capital infusion and leverage thereupon would catapult NBFCs' growth in size and scale. A number of NBFCs have been issuing non-convertible debentures (NCDs) in order to increase their balance sheet liquidity. Also to address this purpose, especially in the infrastructure financing space, a new category of NBFCs was formed called Infrastructure financing companies (IFCs). 

NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. While this is to their advantage, they do not have access to low-cost demand deposits. As a result their cost of funds is always high, resulting in thinner interest spread. However, the regulatory arbitrage may soon change between the two entities with the help of the Usha Thorat committee recommendations, which call for stricter regulations in the space.

 Key Points

Supply Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.

Demand India is a growing economy, demand for long-term loans, especially infrastructure and personal finance is high

Barriers to entry Licensing requirement, investment in technology, skills required for project finance, distribution reach, minimum capital requirements, etc 

Bargaining power of suppliers

Providers of funds could be more demanding, base rate requirements are applicable. As quality of services provided with minimum time matters a lot.

Bargaining power of customers

High, as banks have also forayed into long-term finance and consumer finance.

Competition High. There are public sector, private sector and foreign banks along with non-banking finance companies competing in similar markets.

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 Financial Year'13

• FY13 has proved to be a challenging year on account of subdued economic activity, high interest rates, rising fuel and vehicle prices for the auto financiers. With slowdown in economic conditions, most of the auto space segments reported either a tepid credit growth or a decline in volumes. The cumulative production for the entire automobile sector was recorded at meager 1% for FY13 and the sales volume too witnessed a decline. Furthermore, the worrying part today for auto financiers is the new RBI guidelines that require NBFCs to move to the asset classification and provisioning norms as applicable to banks commencing form FY15. 

Likewise, FY13 proved a challenging year for the infrastructure financiers too. As the domestic saving and investments plummeted, the private investment in infrastructure came to almost a standstill. Regulatory uncertainties, policy issues, execution challenges and eroding confidence impacted the business dynamics of the infrastructure finance companies. Power sector was the worst affected on account of significant unutilized capacity and fuel shortages. That said, with the much required headway made by CCI in fast-tracking key projects and administering clearances, the infrastructure sector has seen the light of the day. 

For housing companies, the fiscal incentives provided in the 2013-14 Union Budget brought respite to the first time homebuyers who are now allowed an additional one-time benefit of interest deduction up to Rs 100,000 on a home loan. Regulatory forbearance, doing away with teaser products and creditworthiness of developers will go a long way in bringing stability in the housing sector. With mere 8% mortgage to GDP ratio of India, it leaves huge market potential for housing financiers to strengthen their footing in the financing market. Furthermore, with rising disposable incomes, increasing urbanization and improving demographics, worst is behind for the housing finance market in India. 

Given the euphoric profit generation by gold-financiers in past couple of years, the RBI took a cautious stance. The new stringent RBI guidelines are expected to result in decline in profitability of gold loan companies. Fear of business concentration risks and business run-downs and the motive to safeguard the interest of the borrowers have prompted the regulator to turn extra-vigilant with respect to gold financing business. 

The Reserve Bank of India is in the process to grant additional branch licenses to private sector banks and NBFCs that meet the central bank's eligibility criteria. These new licenses should be awarded shortly. Many NBFCs, microfinance companies and industrial houses have applied for

the same. 

FY13 also witnessed increased funding cost pressures and negative asset-liability match that dampened the earnings performance of NBFCs.

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 Prospects

The RBI is looking at monitoring the NBFC sector to a greater extent now, especially on account of the sharp increase in finance to the space. This is primarily due to the higher possibility of risks getting transferred from the more leniently regulated NFC sector to the banking sector and concerns over protection of depositors' interests. 

As at the end of March 2013, the total credit managed by NBFCs stood at Rs 3.25 trillion (Source: ICRA) reporting a sharp decline of 10% vis-a-vis previous year. 

Asset quality trends began to deteriorate in FY13 after witnessing an impeccable improvement during 2009-12. 

Cost of funds for NBFCs remained elevated for major part of FY13 given the higher proportion of bank funding in the overall borrowings. With higher base rates of banks, the funding costs are expected to remain high even in the coming periods. That said, few NBFCs managed to contain costs by raising funds through pass through certificates (PTC) routes by securitizing pools that qualify for priority sector lending at attractive rates. 

The credit costs for NBFCs continued to rise in commensurate with the rise in delinquencies during FY13. Moreover, operating costs are also expected to remain elevated on account of rigorous recovery efforts and slower growth. 

Therefore, unless the NBFCs increase their lending rates and improve operational efficiencies, the return ratios are expected to remain under pressure. 

Currently, housing finance companies are in favor given the positive asset-liability position, limited asset quality risks and modest return ratios. 

However, the other asset financier such as the infrastructure and automobile financiers, the scenario still stands grim. Subdued economic environment, higher loan-to-value (LTV) ratios and profitability pressures faced by the CV users have spurted asset quality risks for NBFCs. Moreover, higher interest rates, negative asset-liability position, declining collection efficiencies and increase in re-possession rates have marred the performance of these asset financiers. 

We believe, going ahead, defying the macroeconomic headwinds, NBFCs with retail focused business models backed by penetration in hinterlands should show up robust performance.

2.) Aluminium Sector Analysis ReportThe most commercially mined aluminium ore is bauxite, as it has the highest content of the base metal. The primary aluminium production process consists of three

stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India’s share in world aluminium capacity rests at about 3%. Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite. 

The aluminium production process can be categorized into upstream and downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils. 

Power is amongst the largest cost component in manufacturing of aluminium, as the production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Alternatively, they could set up captive power plants, which is the pattern in India. Indian manufacturers are the lowest cost producers of the base metal due to access to captive power, cheap labour and proximity to abundant supply of raw material, i.e., bauxite. 

The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Vedanta Resources Plc 

The principal user segment in India for aluminium continues to be electrical & electronics sector followed by the automotive & transportation, building & construction, packaging, consumer durables, industrial and other applications including defence.

 Key Points

Supply Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, the demand is stable while supply is in excess. 

Demand Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation. 

Barriers to entry

Large economies of scale. Consequently, high capital costs.

Bargaining power of suppliers

Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalize power costs to a certain extent

in the long-term.

Bargaining power of customers

Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply.

Competition Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.

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 Financial Year '14

The major commodity demand driver China, (that accounts for over 40% of global demand in Aluminium and Copper) slowed down considerably on fears of hard landing for the economy. India too, suffered on account of monetary tightening and subdued investment and growth climate with industry/GDP growth slowing down considerably. 

Global Aluminum demand growth normalized to around 5% in 2012, after a sharp growth in the preceding two years on the back of global recovery from the 2009 crisis. World’s leading manufacturer Alcoa expects demand growth to be in the region of 7% in 2014. In 2014, China’s, North America’s and Europe’s growth is expected to be in the region of 10%,5% and 1% respectively. 

The industry continued to be plagued by high inventories, which has been a huge overhang on the prices. Cost of production for most aluminium players continued to remain high due to challenges pertaining to energy inputs and resources. 

India with its abundant supply of quality bauxite and low cost labour has established itself as a low cost producer of primary aluminium. However, in India, the production of primary aluminium has stagnated around the 1.6 to 1.7 MT mark for the last three years. The three primary aluminium producers, viz. Hindalco, Vedanta and Nalco have expansion plans as well as greenfield projects that should increase the production in the foreseeable future.

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 Prospects

China has been a marginally surplus producer of aluminium, while India turned aluminium deficit in 2011 after being a marginal surplus producer for many years. However, commissioning of new capacities will make India surplus in aluminum in the near future. 

Long term outlook for aluminium continues to remain strong with Global aluminium demand expected to increase at a CAGR of 6%, with expected growth of 9% till 2020. This growth rate, though strong, pales in comparison with the stupendous rate at which Chinese aluminium consumption has grown over the last decade. 

? The supply is expected to remain strong as several producers continued to produce despite low LME. High physical premiums too worked as an incentive to continue production. Global Aluminium production is expected to grow at a rate matching production increase which will come from China and Middle East. Production from both these regions is expected to grow at around 8-9%.

3.) Auto Ancillaries Sector Analysis ReportThe fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. 

Margins in the replacement market are higher than the OEM market. The OEM market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly. 

Indian auto ancillary sector has traditionally suffered from poor quality. While this still holds true for the unorganized sector, the organized sector has been resorting to increased automation to reduce the defect levels. 

Lower labour costs give Indian auto ancillary companies an absolute cost advantage. To put things in perspective, ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in up gradation of technology in recent years.

 Key Points

Supply Low for high technology products. Unorganized sector dominates the domestic component market due to excise benefits. Generally, excess supply persists.

Demand Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing.

Barriers to entry Capital, technology, OEM relationships, customer service, distribution network to meet replacement demand.

Bargaining power of suppliers

Low with OEMs. Relatively high in the replacement market

Bargaining Companies operating in the export market face competition at a global level.

power of customers

At the domestic level, market structure is fragmented for a large number of ancillary products. Most companies adopt low cost and differentiation strategies. In some products (like batteries), only two or three companies control over 80% of the market. 

Competition Will intensify, as global players will enter the market leading to consolidation. Dereservation of SSI will result in access to capital and technology

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 Financial Year '14

If FY13 was a tepid year for the Indian automotive industry, FY14 did even worse what with key segments like passenger vehicles and commercial vehicles witnessing strong YoY declines. Overall, weak sentiments, high cost of ownership, high interest rates and high fuel prices affected demand. 

As a consequence, the Indian automotive industry posted a decline of 9.3% in FY14. Exports on the other hand did relatively well, remaining flat for the car segment while growing around 7% in the two-wheelers space. This was on the back of a revival in the US market and certain new growth drivers in the emerging markets including Africa. 

Just like the auto industry, the auto ancillary industry witnessed a slowdown during the fiscal. Capacity utilization fell on account of the downturn in the auto industry. Besides, with Europe and US remaining weak economically during the first half of the fiscal, even exports could not shore up the revenue profile much.

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 Prospects

There has been a conscious effort by manufacturers to improve productivity of the suppliers in the past few years. Though the number of active vendors has declined significantly for auto manufacturers, technology transfer and fresh fund infusions have resulted in improved productivity in the remaining ones. Relaxation of FDI norms for the small-scale sector could emerge as one of the key growth drivers in the long run. The Indian automotive components industry has lined up sizeable investment schedules for the next few years. 

The automobile sector is cyclical and dependent on the growth of the economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income point towards higher demand for automobiles in the future. Also, government's initiatives in the infrastructure sector such as the Golden Quadrilateral project and NHDP (National Highway Development Programme) are likely to give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect CV segment to grow by 7% to 8%, 2-wheeler demand to increase by around 12% to 15% and passenger car sales growth at 10% to 12% over the medium to long term. This is a positive for auto ancillary manufacturers. 

In the long term, the growth of this sector will depend partly on pace of indigenization levels across all segments. The prospects look bright as most companies are increasing the indigenous components, in an effort to reduce their currency losses and remain competitive. Also, the fact that auto manufacturers like Ford, Hyundai and Maruti are exporting cars, make the prospects look encouraging. 

Margins are likely to come under pressure in the long term because as competition increases, manufacturers will find it difficult to increase prices and will try to cut costs. The burden will eventually fall on auto ancillary players. In the near future though, companies will need to have manufacturing lines that can be adapted for new models, have strong technology backing, an ability to export to developed markets, market dominance in specific products and

a growth plan driven by volumes and product innovations. Companies will have to focus on quality and abide by delivery schedules if they want to survive. As manufacturers sourcing components are keen to get components from fewer sources in future, this will lead to consolidation in the sector. 

The growing number of Free and Preferential trade agreements being signed by India with countries like Thailand, Singapore and other ASEAN countries will hurt the cost competitiveness of Indian companies as Indian players play significantly higher duties than their Asian counterparts. Therefore, Indian companies might lose out on big orders if the duty structure is not rationalized.

4.) Automobiles Sector Analysis ReportThe Indian automobile market can be divided into several segments viz., two-wheelers (motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors. 

Demand is linked to economic growth and rise in income levels. Per capita penetration at around nine cars per thousand people is among the lowest in the world (including other developing economies like Pakistan in segments like cars). 

While the industry is highly capital intensive in nature in case of four-wheelers, capital intensity is a lot less for two-wheelers. Though three-wheelers and tractors have low barriers to entry in terms of technology, four wheelers is technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to take into account future safety regulations. 

As compared to their global counterparts, both the two-wheeler as well as four wheeler segments are relatively lesser fragmented. However, things have changed, especially on the passenger cars front as many foreign majors have entered the Indian market. As a result, pricing power is likely to diminish going forward. 

Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling an incremental unit comes

down. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

 Key Points

Supply The Indian automobile market has some amount of excess capacity.

Demand Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor. 

Barriers to entry High capital costs, technology, distribution network, and availability of auto components.

Bargaining power of suppliers

Low, due to stiff competition.

Bargaining power of customers

Very high, due to availability of options.

Competition High. Expected to increase even further.

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 Financial Year '14

A total of 16.9 m two-wheelers were sold in FY14, a growth of a tepid 7% over the previous year. The slow growth was on account of the overall slowdown in the Indian economy and firm interest rates and fuel prices that dampened demand. Motorcycles accounted for 74% of the total two wheelers sold and grew by a mere 4% YoY. The scooters (geared & ungeared) segment was the star of the two wheeler industry logging in a growth rate of 22% YoY. In the domestic market, the 3-wheeler segment did badly as volumes were down 11% YoY, but the exports growth was strong at 17% YoY. 

It was a second consecutive challenging year for the medium and heavy commercial vehicles (M/HCVs) segment as volumes plunged by 25% during the fiscal given the sluggishness in industrial activity and low freight rates. LCVs were at the receiving end as well as volumes dropped by 17.6% YoY. As a result, volumes for the overall CV industry fell by 20% YoY. The HCV industry is highly cyclical and because the industrial and construction sectors slowed down, its effect was felt on HCVs as well. Both Tata Motors and Ashok Leyland faced heavy challenges during the year given that both of them corner a significant chunk of the CV pie. 

Tractors did very well during the year as monsoons in 2013 were quite healthy and M&M, which is a market leader in the tractors space, benefitted from this as its auto division faced rough weather. 

Passenger vehicles (PV) also did badly as volumes declined by 6%. Slowdown in the economy, firm interest rates and fuel prices had an adverse impact on demand. This time the decline was seen across the segments of the PV space viz., passenger cars, utility vehicles (UVs) and vans. Maruti Suzuki, which is the market leader in the PV space, was not spared either and saw its volumes fall. 

As volumes took a beating, few of the companies did manage to report an improvement in operating margins largely on account of various cost rationalization measures undertaken.

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 Prospects

Given that the Modi government has now come into power, there are expectations of increased focus on reforms and ramp up in infrastructure. Thus, government spending on infrastructure in roads and airports and higher GDP growth in the future will benefit the auto sector in general. We expect a slew of launches both in passenger cars and utility vehicles (UVs) given that the competition has intensified. Since diesel prices have also been hiked, the differential between petrol and diesel will reduce further and this will play an important bearing on a consumer’s purchasing decision. 

In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model launches. Though the market size is expected to grow by 10% to 12%, competitive pressure could keep prices and margins under control. TVS, Honda and Hero Motocorp are poised to benefit from higher demand for ungeared scooters in the urban and rural markets. The 3 wheeler industry, where Bajaj Auto is the market leader, is also poised for growth on the back of new permits opening up and increase in exports. 

While good monsoon is a positive for the tractor sector, given the fact that non-farm incomes have continued to climb up, volumes should still hold up well in the longer run despite a year or two of poor monsoons. The longer-term picture is impressive in light of poor mechanisation levels in the country’s farm sector and the thrust of the government on improving rural infrastructure. 

With an estimated 40% of CVs plying on the roads being 10 years old, demand for HCVs is expected to grow by 7% to 8% over the long term. While the industry is going through cyclical hiccups currently, we expect this factor to weaken in the future on account of strong structural tailwinds. The privatisation of select state transport undertakings bodes well for the bus segment.

5.) Banking Sector Analysis ReportThe global slowdown has taken its toll on Indian economy. Besides, the domestic economy too is having its own set of problems. High inflation, subdued growth, slowing investments, undesirable current account deficit levels, high fiscal deficit and battered currency have together made the growth visibility rather muted. The banking sector, being the barometer of the economy, has succumbed to these challenges. Amidst this challenging scenario, the Indian banking system is continues to deal with improvement in operational efficiency and

execution of prudent risk management practices. 

RBI's hawkish monetary policy stance in order to combat inflation has led to sharp increase in interest rates during FY13. The elevated costs of deposits and limited pricing power ensured margin pressures for most of the banks for major part of FY13. 

Indian banking industry, valued at Rs 77 trillion (Source: IBEF), is growing at a slower pace and plagued by bad loans. In what could be termed as a challenging year, FY13 witnessed steep increase in bad loans of Indian banks and turning them skeptical to extend loans to companies. As a share of sector loan book, the bad loans have gone up from 1.3% in March 2009 to 3.4% in March 2013. Public sector banks that account for 60% of the total banking assets have been the worst hit vis-a-vis its private and foreign counterparts.

 Key Points

Supply Liquidity is controlled by the Liquidity is controlled by the Reserve Bank of India (RBI).

Demand India is a growing economy and demand for credit is high though it could be cyclical.

Barriers to entry Licensing requirement, investment in technology and branch network, capital and regulatory requirements.

Bargaining power of suppliers

High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms and orchestrate strikes. Depositors may invest elsewhere if interest rates fall.

Bargaining power of customers

For good creditworthy borrowers bargaining power is high due to the availability of large number of banks.

Competition High- There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments. Plus the RBI is all set to issue new banking licenses soon. 

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 Financial Year '13

The Central Statistical organization (CSO) reported the lowest real GDP growth at 5% during FY13. This growth stands lowest in the decade and even weaker than the recorded during the first

year of global financial crisis. Banking sector, being inextricably linked to the economy, stood in a state of limbo for major part of FY13. 

During FY13, the gross bank credit grew at a slower pace recording 15.1% YoY growth as against 17.3% a year ago. The numbers also stood below RBI's projections for FY13. Sluggish demand conditions, weak monetary policy transmission, poor asset quality and debilitating macro-economic conditions led to lower credit growth during FY13. 

Except retail, the slowdown in credit was witnessed across sectors such as agriculture, industry and service segments. The RBI data reveals that retail trade and credit card outstanding were the only buoyant segments during FY13. Mid-sized businesses and loans for professional services were the worst hit. 

Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation during FY13, banks became more risk averse to lending credit. This deceleration also reflected banks' risk aversion in face of rising NPAs and increased leverage of corporate balance sheets. The deceleration was observed across all bank groups, being high for PSUs and private sector banks, which jointly account for above 90% of the total bank credit. 

The RBI had administered a 1% repo rate cut and injected liquidity through CRR and SLR cuts as also through open market operations during FY13. However, banks have only cut their base rate by meager 0.25%-0.30% owing to the liquidity constraints and weak deposit growth. 

The aggregate deposits grew marginally to 14.2% at the end of March 2013 as against 13.8% in FY12. The growth differential between deposit and credit continued to hover between 2-3% with deposit growth outpacing the credit growth. The credit-deposit ratio was recorded at 78.1% during the same period. This ensured tight liquidity conditions during the whole of the FY13. 

CASA, the cheap source of funds for banks, also remained sluggish for the major part of FY13. The elevated interest rates during FY13 led to migration of money from CASA deposits to fixed deposits. 

Slower loan growth and weak CASA accretion resulted in margin (NIM) pressures for the banking industry. Furthermore, lower NIMs combined with higher credit costs that were earmarked for the bad and restructured loans dampened the earnings performance of Indian banks during FY13. 

The sharp industrial slowdown during FY12 and FY13 took a toll on the asset quality of the banks. Gross NPAs of 40 listed banks went up by 43.1% from levels a year ago. The restructured book also spiked up dramatically with recast assets under CDR standing around 50% more than the previous year. The repercussions were largely felt by public sector banks as they were the ones to support the productive sectors of the economy. 

Private sector banks, on the other hand, were better placed than its PSU peers during FY13. Better asset quality, higher margins and strong loan growth boosted the performance of private banks during the same period.

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 Prospects

Going forward in FY14, the Economic Advisory Council of Prime minister expects the economic growth to rise to 6.4% from the current 5% on the back of the recent structural measures and normal monsoons. 

Growth is still a concern for the banking sector on account of a sustained slowdown in the

economy as well as reduced demand for credit on account of the current high interest rate environment. Sectors such as iron & steel, textiles, power generation, automobiles and ancillaries, telecommunication, aviation, construction, real estate, infrastructure, steel and cement are expected to throw-up challenges in terms of asset quality pressures for the forthcoming periods. 

The domestic economic slowdown will continue to play spoilsport resulting in increase in non-performing loans and restructured loans especially for PSU banks. Given the greater stress expected to confront PSU lenders going forward, the margins and earnings performance are expected to take a hit. Given the core earnings standing extremely low for PSU banks, their balance sheets will be victim of higher credit costs, higher liabilities on account of wage revisions and wider MTM losses due to rising yields. 

As per regulatory requirements Indian banks need to shore up their capital base to adhere to the incumbent BASEL III norms. With PSU banks falling short of the target, a consistent annual equity infusion of Rs 160-180 bn is expected to flow from government over the next 5 years. As per the FY13 budget, the government of India had allocated Rs 127 bn for capitalization of PSU banks and plans to invest Rs 140 bn in FY14. 

Going by the dynamic nature of the real economy, it is imperative that the banking system will require being flexible and competitive. Notwithstanding the expanding branch network of Indian banks, the banking penetration still stands low in comparison to the global benchmark. Hence, the pressing need for financial inclusion and the issuances of new banking licenses to the private sector will continue to take precedence even in FY14. The RBI is in the process of issuing new bank licenses to those private players that would stand consistent with the highest standards of transparency and diligence. Moreover, necessary reforms, regulations for free entry and making the licensing process more frequent also forms the agenda of the RBI for the coming periods.

6.) Beverages, Food & Tobacco Sector Analysis Report

India is the world's second largest producer of food after China. It is the largest producer of milk, second largest producer of fruits and vegetables and the third largest fish producer in the world. Armed with a huge agriculture sector, abundant livestock and cost competitiveness, India is fast emerging as the sourcing hub of processed food. As per Indian Council of Agricultural Research, the food processing industry was valued at $121 bn in 2012 and is expected to reach $194 bn by 2015. Food processing currently enjoys a share of less than 10% of production while for the countries; the processing share is 30%-50% with developed

countries having a share of almost 100% (Source: McKinsey & CII report). 

The food processing industry is segmented into dairy, fruit & vegetable processing, grain processing, meat & poultry processing, fisheries and consumer foods that include packaged foods and beverages. The industry is characterized by a huge presence of small scale operations with the unorganized sector forming 70% share by volume and 50% share by value. The dairy sector, which has the highest share of processed foods, is dominated by unorganized players. A few corporate players including MNC's such as Nestle and Britannia have forayed into emerging segments such as Ultra Heat Treated (UHT) and flavoured milk. Even ITC wants to enter the dairy sector in a big way. In fruits and vegetables, juices and pulp concentrate are largely manufactured by the organized sector whereas traditional items such as pickles, sauces and squashes are manufactured by the unorganized sector. 

The cigarette industry faces discriminatory taxation. This is reflected in the fact that though cigarettes account for only 15% of the total tobacco consumption (including non-smoking forms such as bidi, gutkha, khaini and zarda), it contributes over 74% to the government exchequer in the form of tax revenues. Excise duty on cigarettes accounts for more than 50% of its selling price. The cigarette industry is not only subject to frequent revision in excise duty but faces differential VAT rates in various states. A plethora of 29 different tax rates are applicable on cigarettes across states in India that has compelled manufacturers to adopt state specific pricing.

 Key Points

Supply Abundant supply through a distribution network of over 8 m stores across the country. Distribution networks are being strengthened in the rural areas. Tobacco enjoys high penetration even in rural areas as bidis are manufactured by the unorganized sector.

Demand Processed food demand is growing at a robust pace. Rising contribution of women to the working force and growing nuclear families has led to higher demand for convenience foods, especially in urban areas. Tobacco demand being habit-forming is largely inelastic. 

Barriers to entry Huge investments in establishing brand identity and setting up distribution networks. Cigarettes, in addition, suffer from punitive taxation policies of

government.

Bargaining power of suppliers

Suppliers being small and fragmented have limited bargaining power. Companies like ITC source their agri-inputs internally thereby reducing their dependence on suppliers. Most tobacco companies have integrated backwards and have their own supply chains. Therefore, the bargaining power of suppliers is not high.

Bargaining power of customers

In packaged foods, the bargaining power of customers is restricted to the mass or the lower end of the price segment which is price-sensitive. As tobacco consumption is more or less a habit, the bargaining power of consumers is only to the extent of choice of the brand.

Competition Domestic unorganized players pose competition. The recent inflationary environment has led to increased demand for private label brands that are available at a discount. In case of tobacco, branded cigarettes, bidis and contraband compete with each other.

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 Financial Year '14

In FY14/CY13, food and beverage companies reported a mixed financial performance. Nestle's topline growth in CY13 slipped to single-digits for the first time in eight years on sluggish volume growth. Due to sluggish coffee sales, Tata Coffee reported a 1.2% fall in sales whereas Tata Global Beverages saw its topline grow by a muted 5.3% in FY14. Britannia has posted a robust 11.8% growth in revenues. Glaxo SmithKline Consumer Healthcare (GSKCH) registered a huge 53% jump in its sales for the 15-month period as the company is changing its financial year from December to March ending. Both cigarette companies ITC and VST Industries clocked robust growths of 11% and 18%, respectively in FY14. 

Easing commodity prices have enabled companies like Britannia and ITC to post incremental margins whereas GSKCH and Tata Coffee have managed to keep margins in-tact. However Nestle saw its operating margin contract by 0.7% due to higher ad-spends and other expenses. Even Tata Global Beverages reported lower operating margin due to fall in profitability of coffee segment. Barring Tata Coffee and Tata Global Beverages, all companies reported robust growth in profits. Nestle saw a subdued 4.6% profit growth due to higher interest and depreciation charges and increased provisioning.

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 Future Prospects:

Backed by growing population and rising affluence, India's overall food consumption is expected to increase by 4% from Rs 11 trillion in 2010 to Rs 23 trillion in 2030. The per capita consumption is expected to rise by 3% from Rs 9,355 to Rs 15,731 over the same period. The packaged food industry has been forecast to grow by a faster 9% to reach Rs 6 trillion by 2030 (Source: McKinsey & CII report). Demand drivers such as urbanization, increase in the number of nuclear families and growing number of working women, higher disposable income and the changing consumption pattern are likely to boost demand for processed foods. Widening reach of organized retail will also boost growth. 

To attract investments, the government has allowed 100% FDI in the food processing industry. Additionally, an income tax deduction of 100% of profit for five years and 25% of profit for the next five years is allowed in case of new agro processing industries. Also machinery used in the

installation of cold stores has been fully exempted from excise duty. 

Punitive taxation on cigarettes has risen with steep hikes in excise duty for three years in a row. In the recently announced Budget for 2014-15, the the micro (< 65 mm) and regular (65-70 mm) filter segments were subject to steep increase in excise duties by 72% and 17%, respectively. The excise increases in the long (70-75 mm) and kingsize (75-85) segments were 11% and 21%, respectively. The government maintains a strong stance against cigarette smoking as proposals such as ban on sale of loose cigarettes, higher fines of Rs 20,000 on public smoking and raising the age limit on smoking from 18 to 25 years are in consideration.

7.) Cement Sector Analysis ReportThe Indian cement industry is the 2nd largest market after China accounting for about 8% of the total global production. It had a total capacity of over 360 m tonnes (MT) as of financial year ended 2013-14. Cement is a cyclical commodity with a high correlation with GDP. The housing sector is the biggest demand driver of cement, accounting for about 67% of the total consumption. The other major consumers of cement include infrastructure (13%), commercial construction (11%) and industrial construction (9%). 

The Indian cement industry grew at a commendable rate in the previous decade, registering a compounded growth of about 8%. However, the growth slowed down in the period 2011 to 2013 when cement consumption grew at an average rate of 4%. Moreover, the per capita consumption of cement in India still remains substantially low at about 192 kg when compared with the world average which stands at about 365 kg (excluding China). This underlines the tremendous scope for growth in the Indian cement industry in the long term. 

Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. The Southern region of India has the highest installed capacity, accounting for about one-third of the country's total installed cement capacity.

 Key Points

Supply The demand-supply situation is highly skewed with the latter being significantly

higher.

Demand Housing sector acts as the principal growth driver for cement. However, industrial and infrastructure sectors have also emerged as demand drivers.

Barriers to entry High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier.

Bargaining power of suppliers

Licensing of coal and limestone reserves, supply of power from the state grid etc are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel prices remain a concern.

Bargaining power of customers

Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. However, things are changing and few brands have started commanding a premium on account of better quality perception.

Competition - Intense competition with players expanding reach and achieving pan India presence. The industry is a lot more consolidated than a couple of decades ago with a few large players controlling substantial market share.

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 Financial Year '14

During the financial year 2013-14 (FY14), India's cement industry grew by 3-4% year-on-year (YoY). The subdued growth was mainly attributable to slowdown in construction activities, regulatory delays in infrastructural projects, high interest rates, prolonged monsoons and natural disasters such as floods and cyclone in some parts of the country. 

The industry witnessed high operating costs, including all major cost heads such as raw materials, energy and freight. The steep depreciation of the rupee and hike in rail freight and diesel prices further aggravated the concerns.

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 Prospects

Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. Given the Modi government’s thrust on housing and infrastructure development, cement demand is expected to pick up in the coming times. The weakness in the international crude oil prices and other commodities should help bring costs under control and improve profitability of the sector. If inflation comes under control, a likely lowering of interest rates would be a big positive for the cement sector. 

While temporary challenges remain in the form of excess capacity, the long term drivers for cement demand remain intact. Higher government spending on infrastructure, robust growth in rural housing and rising per capita incomes are likely to augur well for the cement industry.

8.) Construction Sector Analysis Report 

India is on the verge of witnessing a sustained growth in infrastructure build up. The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply, rail transport and airport development. While the construction sector's growth has fallen as compared to the pre-2008 period, it has picked up in the recent past. Its share as a percentage of GDP has increased considerably as compared to the last decade. To put things in perspective, the total investment in infrastructure - which in this case also includes roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation - is estimated to have increased from 5.7% of GDP in 2007 to around 8.0% by 2012. The Planning Commission of India has proposed an investment of around US$ 1 trillion in the Twelfth five-year plan (2012-2017), which is double of that in the Eleventh five-year plan.

From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. Given that the resource constraints of the public sector will continue to limit public investment in infrastructure in infrastructure investments, - especially backward and rural areas - the PPP based development will be needed wherever feasible. At the same time, reviewing the factors that constrain private investments would be necessary to encourage and speed up the process. The share of private investments is expected to increase to half in the Twelfth five-year plan as compared to the intended 30% for the Eleventh five-year plan. 

The real estate industry comprising of construction and development of properties has grown from family based entities with focus on single products and having one market presence into corporate entities with multi-city presence having differentiated products. The industry has witnessed considerable shift from traditional financing methods and limited debt support to an era of structured finance, private equity and public offering.

The construction sector is a major employment driver, being the second largest employer in the country, next only to agriculture. This is because of the chain of backward and forward linkages that the sector has with other sectors of the economy. About 250 ancillary industries such as cement, steel, brick, timber and building material are dependent on the construction industry. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times. 

 Key Points

Supply The past few years has seen a substantial increase in the number of contractors and builders, especially in the housing and road construction segment.

Demand Demand exceeds supply by a large margin. Demand for quality infrastructure construction is mainly emanating from the housing, transportation and urban development segments.

Barriers to entry Low for road and housing construction. However, high working capital requirements can create growth problems for companies with weak financial muscle.

Bargaining power of suppliers

Low. Due to the rapid increase in the number of contractors and construction service providers, margins have been stagnant despite strong growth in volumes.

Bargaining power of customers

Low. The country still lacks adequate infrastructure facilities and citizens have to pay for using public services.

Competition Very high across segments like road construction, housing and urban infrastructure development. Relatively less in airport and port development.

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 Financial Year '12

The construction industry witnessed a slowdown in FY12, after the economy showed some resilience in the preceding two years. With the overall GDP growth slowing down, the growth in the construction industry dipped to 4.8% in FY12. In addition, the high levels of inflation led the RBI to keep the interest rates high, thereby reducing investments. Project financing also became difficult on the back of the increasing gestation periods of the projects, thereby leading financial institutions to take a cautious approach towards funding projects in the sector. 

The 2012-12 budget saw the government double the financing limit of financing infrastructure projects to Rs 600 bn. For the power and coal sector, the Government proposed External Commercial Borrowings (ECB) to part finance rupee debt of existing power projects. To encourage PPP in road construction projects, the budget proposed to allow ECB for capital expenditure on the maintenance and operations of toll systems for roads and highways. 

FY12 was a challenging year for the Indian real estate sector marked by declining volumes, over supply (in certain pockets) and lack of sustained economic activity. The leasing business witnessed a slowdown on factors such as oversupply, lower foreign investments and poor domestic triggers. The retail segment however witnessed a mixed year as overcapacities got absorbed. As for the residential segment, the same remained muted. The trends varied in different markets with some witnessing price correction and other seeing higher volume growth. 

On an overall basis, companies from the real estate and construction sector faced issues related to higher interest costs on the back of leveraged balance sheets. The Reserve Bank of India kept the interest rates on the higher side due to concerns over the high inflation levels. Towards the end of the year, a handful of companies announced plans to improve the health of their balance sheets by selling off their stakes in the non-core businesses and improving the cash collection cycles, launching and bidding for projects on a selective basis, amongst others.

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 Prospects

India requires quality infrastructure. This simple fact is the long term driver of the construction sector as infrastructure investments are the most important growth driver for construction companies. While short term factors will keep the sentiments subdued, over the long term, demand will remain strong. The proposed increase in allocation in the twelfth five-year plan (2012-2017) will translate into a healthy business for construction companies. . 

Demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of financing options as well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. According to a technical committee set up by the Ministry of Housing & Poverty Alleviation, the total housing shortage in the country stood at about 18.78 m at the start of the twelfth five-year plan. This provides a big investment opportunity. The commercial segment however is going through a tough phase and is likely to do so in the short to medium term on account of overcapacity. 

While long-term factors are likely to work in favour of the real estate developers, the outlook for the short term remains uncertain. High interest rates and negative consumer sentiments continue to impact business for the real estate players. Also, the fact that banks have been turning cautious towards rescheduling debt or issuing fresh loans to real estate companies is a dampener for the sector. The overall long term risks also include increased prices of the essential raw materials like cement, bricks and steel coupled with the increasing in labour costs, which together make for almost 75% of overall construction cost. Liquidity is also another factor that will determine overall project execution. While entry into affordable housing by many players would curb the declining

trend of the topline as witnessed during the downturn, it is likely to put pressurize on margins.

9.) Consumer Products Sector Analysis ReportThe consumer products industry had been witnessing robust growth in the past few years backed by strong economic growth and rising rural income. Factors such as rapid urbanization, evolving consumer lifestyles and emergence of modern trade were driving its growth. 

The industry is still urban-centric with majority of the goods being consumed by urban India. Metropolitan cities and small towns (population of 1-10 lakh) have been driving FMCG consumption in urban India since 2002. In fact, middle India, comprising of small towns, has been growing the fastest across rural and urban segments. As per Nielsen, the FMCG market size of middle India is set to expand rapidly over the next two decades. Rural India, where 70% of the population resides, presents the biggest market potential for the industry. Backed by low unit packs and aggressive distribution reach, rural market size is expected to expand in the future. 

Consumer goods are retailed through two primary sales channels - General Trade and Modern Trade. General trade comprising of the ubiquitous kirana stores is the largest sales channel forming 95% of overall retail sales. However, growth of consumer goods retailed through modern trade channel is outpacing the growth of FMCG products in general trade. Factors such as a comfortable and modern store experience, access to a wide variety of categories and brands under a single roof and compelling value-for-money deals are attracting consumers to organised retail in a big way. But modern trade is still an urban phenomenon in India. Product categories such as packaged rice, liquid toilet soaps, floor cleaners, breakfast cereals, air fresheners and mosquito repellent equipment have a higher penetration in modern trade channel. Modern trade is expected to gain greater importance with opening up of foreign direct investment in multi-brand retail. 

The implementation of the Goods and Services Tax (GST) is expected to benefit the sector immensely by reducing the overall incidence of taxation. GST aims to reduce the cascading effect by replacing a multitude of

indirect taxes such as central excise, service tax, VAT and inter-state sales tax with a single GST rate. Moreover, FMCG companies will be able to optimize logistics and distribution costs in the GST era. The resulting cost savings by the companies can be passed on to the final consumer thereby boosting demand. However, the implementation of GST has currently been put on the backburner by the government.

 Key Points

Supply: Abundant supply through a distribution network of over 8 m stores across the country. Distribution networks are being beefed up to penetrate the rural areas.

Demand: Being items of daily consumption, demand is least impacted by economic slowdown.

Barriers to entry: Huge investments in setting up distribution networks and promoting brands and competition from established companies.

Bargaining power of suppliers:

Inputs being mostly agri-commodities, the suppliers are numerous and lack scale to wield bargaining power. Companies like ITC that are integrated backwards have lower dependence on suppliers.

Bargaining power of customers:

Customer does not have bargaining power in case of branded products but intense competition within the FMCG companies results in value for money deals for consumers (e.g. buy one, get one free concept). 

Competition: Competition is faced from domestic unorganized players and established MNCs. Price wars are a common phenomenon. Private labels offered by retailers at a discount to mainframe brands act as competition to undifferentiated and weak brands.

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 Financial Year 2013 -14

In 2013, the FMCG industry was hit by slowdown in offtake. The overall growth of the industry halved to 9.4% during the year on the back of a mere one percent volume growth (Source: Nielsen). The industry had clocked a 9% growth in offtake in 2012. The slowdown in offtake during 2013 was more pronounced in non-food discretionary items such as personal care products. 

Most of the FMCG companies have reported double-digit growth in FY14. However, FMCG behemoth Hindustan Unilever clocked an 8.7% topline growth due to slower growth in the Home and Personal care segment. Even Marico’s sales grew by a measly 1% as the company demerged its Kaya skincare business during the year. Procter & Gamble posted the fastest growth of 22% backed by double-digit in both feminine hygiene and healthcare businesses. Dabur was able to register 15% revenue growth on double-digit volume growth. The growth was aided by widened distribution network particularly due to Project Double. 

A number of FMCG companies like HUL, Dabur and Procter & Gamble Hygiene & Healthcare

benefitted from easing commodity prices and posted increased profitability. Even Marico recorded high profit margin due to savings in staff costs, ad-spends and other expenses after de-merger of the skincare business. However, higher ad-spends and other operating expenses clipped margins of Colgate and Godrej Consumer Products during the year.

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 Prospects

The election of a pro-reform government at the centre by a huge mandate has led to improvement in the overall sentiments in the economy. However, rural India is not likely to witness a boost in demand as the there has been no major increase in NREGA allocation in Union Budget 2014 and monsoons have been below normal. Demand revival in urban India will spur the next wave of growth for FMCG companies. As per a survey by IMRB and Kantar Worldpanel, value added variants of consumer products are witnessing faster growth than the mass end variants. Demand drivers such as increasing working population, higher monthly expenditure and growing access to modern trade and e-commerce will drive the growth of value-added and premium consumer products. 

On the input cost front, the import duty on crude-based derivatives used in soaps and detergents has been slashed in Union Budget 2014. Even crude prices have fallen below $100 a barrel which will benefit the industry through savings in raw material and packaging costs.

10.) Energy Sources Sector Analysis ReportEnergy value chain has 2 stages - upstream (exploration and production) and downstream (refining and marketing). Post extraction from reserves, crude oil is processed to yield various petroleum products, which are then marketed. 

The gas consuming sectors can be broadly classified into – Priority (power, fertilizers) and unregulated sectors (industrials, refining etc). The gas demand in India is met through either domestic supplies or imported gas (LNG). There are broadly two pricing regimes for the gas in country - Administered Pricing Mechanism (APM) and non-APM, which applies to imported gas (LNG) and gas produced from JV fields. The domestic gas price has been recently revised from US$ 4.2 per mmbtu (million British thermal units) to US$ 5.6 per mmbtu. 

There are presently three major pipeline entities in gas transportation in the country - GAIL (operating HVJ and DVPL), RGTIL and GSPCL. The natural gas is sourced from KG-D6, Mumbai offshore, Cambay Basin, Ravva Offshore, KG Basin, Cauvery basin and imported LNG. 

As per the Government mandate, the priority sector has

the first claim over domestic gas which is less costly than the imported. 

While petroleum had been officially deregulated in June 2010, the Government has recently announced deregulation for diesel. However, kerosene and LPG are still regulated.

 Key Points

Supply In the upstream segment, supply from the domestic market caters to 20%-25% of the total demand for crude oil. In the gas segment also, with the domestic gas supplies on a decline, the share of imports in gas sector is rising. In the downstream segment, refining has seen significant capacity addition in the recent past. 

Demand In the past, we have seen a fair degree of correlation between the growth in petroleum products and the growth in the overall economic activities. Thus demand will be in line with economic growth.

Barriers to entry

In the upstream segment, government permission is required to commence operation. Finding, exploration, development and production cost of oil fields are significant, thus barriers are higher.

Bargaining power of suppliers

Crude prices are globally determined and are highly susceptible to geopolitical events, economic growth and demand factors, economic policies, and speculative bets. Since domestic availability is only about 20%-25% of the requirement, India is basically a price taker as far as crude is concerned. For the petroleum products, given the surplus capacity in the country the bargaining power is low. While OPEC is the cartel that had a major influence on oil prices, with shale revolution and increasing oil production in US, OPEC's supremacy has been challenged. 

Bargaining power of customers

Now that the petrol and diesel are deregulated, there is likely to be competition in the fuel retailing space giving more bargaining power to consumers. 

Competition The Government of India (GoI) has enacted various policies such as new exploration licensing policy [NELP] and coal bed methane [CBM] policy to encourage investments and competition across the industry's value chain. However, the dominance of ONGC in the segment will continue for some time to come. In the downstream segment, increased action is expected in product pipelines and city gas distribution. With new reforms announced in energy sector, more players are likely to enter oil and gas sector thus increasing the competition.

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 Financial Year '14

Crude oil production in India stood at 37.8 MMT in FY14 while consumption and production of Petroleum Products was at 158.2 MMT and 220.2 MMT. The crude oil imports for the year amounted to US$ 142.9 bn while Petroleum Products imports amounted to US$ 12.3 bn. Total domestic oil and gas production in FY14 stood at 73.2 MMTOE while overseas production of OVL (ONGC Videsh Ltd)stood at 8.4 MMT. 

Domestic gas production in FY14 stood at 35.5 billion standard cubic metre (bscm) while LNG imports amounted to 14.3bscm. The length of the pipeline network for natural gas was around 15,340 Km, with GAIL alone accounting for 71% of the network, followed by Reliance and GSPCL with 10% and 12% share respectively. The natural gas pipeline capacity in FY14 was 395 mscmd. 

Installed refinery capacity as on April 2014 stood at 215.1 MMTPA. The crude oil processed in FY14 stood at 222.4 MMT. 

The crude price (Indian basket) in FY14 stood at US$ 105.52 per barrel, down from US$ 107.97 per barrel in FY13. The rupee dollar exchange rate in FY14 stood at Rs 60.5 per dollar, versus Rs 54.45 per dollar in FY13. 

For FY14, under recoveries on diesel and kerosene (PDS) stood at Rs 8.4 and Rs 33.98 per litre while subsidized LPG incurred under recovery loss to the extent of Rs 499.5 per cylinder. The total under recovery burden in FY14 stood at Rs 1,399 bn. It was shared by Government, Upstream and oil marketing companies in the ratio of 51%, 48% and 1% respectively. 

Under recoveries are highly sensitive to crude prices and exchange rate. The overall borrowings for OMCs at the end of FY14 stood at Rs 139 bn, almost similar to level in FY13. The Petroleum subsidy as a % of GDP stood at 1.75%, as compared to 1.7% in FY13.

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 Prospects

The oil and gas sector since long has been a victim of regressive policies such as regulated price

regime for Petroleum products. High dependence on imports for crude oil and gas have further

made India's energy sector quite vulnerable. However, over the last two years, some positive

changes have unfolded. Diesel has been deregulated and gas prices have been hiked. Such

developments will promote investment in the upstream and downstream segment. There is likely

to be competition from private players thus challenging market share of state run companies. 

As per the estimates for PPAC (Petroleum Planning & Analysis Cell), the demand for petroleum products and natural gas over the next three years is likely to grow by 5.1% and 8.4% respectively. 

Because of the increased APM gas allocation and priority of domestic gas to CGD entities , the CGD consumption is growing because of higher off take. 

Going forward, the major focus will be on Exploration and Production. The Government is also planning to take significant steps in shale gas exploration and optimizing recovery from ageing fields. 

With regards to refining, the country is exposed to issues like surplus capacities, competitive refining margins, stringent product specifications and greater emphasis on cleaner fuels. 

The sector is quite vulnerable to global threats like slowdown in the US/ Europe, tensions between Iran and US region etc. Going forward, higher domestic production, regulatory reforms across the value chain and pipeline, refining and gas infrastructure will be the driving factors for the sector.

11.) Engineering Sector Analysis ReportEngineering is a diverse industry with various segments. A company from this sector can be a power equipment manufacturer (like transformers and boilers), execution specialist for Engineering, Procurement and Construction (EPC) projects or a niche player (e.g.: providing environment friendly solutions like waste water and air pollution treatment plants). The company can also be an electrical, non-electrical machinery or static equipment manufacturer too. 

Order book size is the biggest determinant of the company's performance in engineering sector. The same holds true for construction companies as well. It indicates companies' revenue visibility. In order to bag big contracts, companies need to have a strong balance sheet and proven execution capabilities. Companies in these sectors need huge working capital to execute bigger contracts. In most cases, they receive only part payment at initial stages and the remaining comes as projects get executed. 

Indian capital goods manufacturers have been facing competition from foreign players; particularly Chinese and Korean manufacturers since the onset of 11th five year plan. Domestic power equipment capacities in 2008-2009 were unable to fulfill the burgeoning demand for power plants in the country. Therefore, import duties were relaxed in order to attract foreign suppliers to India. Currently, despite increased domestic capacities, low cost foreign manufacturers still give tough competition to domestic manufactures. 

Power sector contributes almost 70-75% to the engineering companies' revenues. The government plans to add large-scale generation as well as transmission and distribution (T&D) capacities in view of the paucity of power in the country. Thus, there is enormous potential for the engineering majors in both generation and T&D space. 

Given the lack of quality infrastructure in India, the construction industry has been witness to a strong growth wave powered by large spends on

housing, road, ports, water supply, rail transport and airport development over the long term. The sector's growth has however remained subdued over the past few years - especially when compared to the pre-2008 period. A big reason for this is the stalling of various big ticket projects in the recent past due to myriad reasons. Infrastructure is also a key area of operation for major Indian engineering companies.

 Key Points

Supply Supply is abundant across most of the segments, except for technology intensive executions. However, supply of equipments face bottlenecks such as logistics and lack of manpower for timely assembly and erection of equipments; etc. 

Demand Demand growth in this sector is fuelled by expenditure in core sectors such as power, railways, infrastructure development, private sector investments and the speed at which the projects are implemented. The pace of project execution has been lumpy in the year gone by due to delays in execution and cash crunch on the part of clients. 

Barriers to entry Barriers to entry are high at upper end of the industry as skilled manpower and technologies as well as ability to execute large projects are a prerequisite in engineering sector. However, in few construction businesses like road business, which are not very technologically inclined, the company's expertise in execution is the key differentiator. 

Bargaining power of suppliers

Bargaining power of suppliers is low because of intense competition amongst them. However, in technology driven high-end segments, suppliers have the upper hand.

Bargaining power of customers

Bargaining power for technology driven and highly skilled segments is low. However, fierce competition has increased bargaining power of customers in power generation and T&D equipments. 

Competition Majority of the companies compete in terms of pricing, experience in specific field, quality of equipment, capabilities with respect to size of projects that can be handled and timely execution. Nevertheless, competition is higher in the industry as companies of all sizes have been trying to move towards scaling up their technology and capacity.

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 Financial Year '14

FY14 was yet another disappointing year for the Indian engineering industry. Order inflows were weak due to delays in project awards, land acquisition problems and environmental issues. Even the operating margins came under pressure due to commodity price inflation. Thus, rising commodity prices and slowdown in order inflows proved to be a double whammy for the engineering companies. 

Due to higher interest rates and lack of availability of funds for infrastructure and other industries;

capex failed to pick up during the year. Also, with inflation continuing to reign high we do not expect rate cycle to witness sudden massive cuts for the next few quarters. This could further impact the momentum in industrial capex. However, with the formation of a stable government at the centre which enjoys a strong majority, the capex cycle may very well pick up sooner rather than later. 

The situation in the construction industry remained subdued in FY14 - given the slowdown in the overall economy. High levels of inflation led the RBI to keep the interest rates high, thereby impacting investments. A key issue faced by private players has been financial pressures in terms of financing coupled with errors in estimation and delays in execution across segments. This has led to stress in the balance sheets of many of these companies too.

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 Prospects

World class infrastructure is of utmost importance for unleashing high and sustained growth. In fact, it is the long term driver for the construction sector as well. While short term factors may keep sentiments subdued, over the long term, demand will remain strong. The proposed increase in doubling investment in infrastructure from Rs 20 trillion to Rs 41 trillion in the twelfth five-year plan (2012-2017) will translate into a healthy business for construction companies. 

From a policy perspective there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in with numerous BOT (build, operate and transfer) projects being awarded to various private sector companies. This makes the future of the Indian engineering and construction sector promising. 

The government's initiative to bring clarity to the power sector reforms is a welcome sign for the industry. As per Government official reports, regulatory delays have stalled projects worth about Rs 2,000 bn in the road, power, coal and mining sectors alone. The government has been working on trying to fast track large sized infrastructure projects. It will work to expedite these projects which have been stalled due to delay in clearances, funding and various other reasons. These initiatives may help revive the Engineering and Construction sector going forward. 

The next couple of years may remain challenging for the engineering and construction companies. While execution pace is slowing down due to various internal as well as macro issues, margins have also come under pressure due to rising input cost, competition and over capacity in a few sub sectors. Thus, unless the macro-environment improves overall growth will continue to remain sluggish in the near term.

12.) Hotels Sector Analysis ReportTourism has now become a significant industry in India. As per the World Travel &

Tourism Council, the tourism industry in India is likely to generate US $121.4 bn of economic activity by 2015, and the hospitality sector has the potential to earn US $24 bn in foreign exchange by 2015. The booming tourism industry has had a cascading effect on the hospitality sector with an increase in the occupancy ratios and average room rates. In FY14, the occupancy ratio was around 57%, up 1% from last year. The average room rate decreased over the last one year by about 3.4% due to supply pressures and the general slowdown in the economy. The long term outlook for the Indian hospitality business continues to be positive, both for the business and leisure segments with the potential for economic growth, increases in disposable incomes and the burgeoning middle class. 

Government of India increased spend on advertising campaigns (including for the campaigns 'Incredible India' and 'Athithi Devo Bhava' - Visitors are like God) to reinforce the rich variety of tourism in India. The new Indian government has stated that tourism will be a key focus sector. 

As per Cushman & Wakefield (C&W) reports, hospitality sector of India is expecting to witness better infrastructure growth. Approximately 4,304 new hotel rooms are expected to open in 2014, of which 36% for Mid-scale, 13% in the upscale segment, 17% is expected for Budget segment, 13% in Upper Upscale, and 20% in the Luxury segment.

 Key Points

Supply There is a shortage of about 100,000 guest rooms in the country. This is expected to keep ARRs stable for at least the next few years.

Demand Largely depends on business travelers but tourist traffic is also on the rise. Demand normally spurts in the peak season between November and March. 

Barriers to entry High capital costs, poor infrastructure facilities and scarcity of land especially in metros.

Bargaining power of suppliers

Limited due to higher competition, especially in metros.

Bargaining power of Higher in metros due to increasing room supply.

customers

Competition Intense in metros, slowly picking up in tier-2 and tier-3 cities. Competition has picked up due to the entry of foreign hotel chains.

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 Financial Year '14

The international travel and tourism industry continues to show moderate growth and as per United Nations World Tourism Organisation (UNWTO). International Tourist Arrivals, worldwide, grew by 5% in 2013 to reach 1.087 bn from 1.035 m in 2012. As per World Travel and Tourism Council (WTTC) estimates, travel and tourism sector’s contribution to the global economy continued to increase for a fourth consecutive year. Its economic contribution, from both direct and indirect activities combined, was US $7 trillion in Gross Domestic Product (GDP) and 266 m jobs. Thus, travel and tourism sector accounts for 9.5% of global GDP, 1 in 11 jobs, about 5% of investment and 5% of exports. 

As per WTTC, in India, the total direct and indirect economic impact of the travel and tourism industry was US$ 128 bn, being 6.7% of the GDP and over 39.4 m jobs. As per statistics updated by the Indian Ministry of Tourism, the Foreign Tourist Arrivals in India has remained steady. While there has been a considerable slowdown in the growth rate, it is at par with the global scenario and can be expected to pick up. India’s export earning earnings from tourism increased to US$ 21.9 bn in 2013. This was 13% of all exports from the services sector. 

In terms of hospitality industry’s performance in India, the overall rates, occupancies and RevPAR (Revenue per room) have been stagnant owing to the impact of increased supply in the market and the general recessionary environment. 

Supply overhang in certain cities, increase in food and fuel costs and rising interest rates have eroded the margins for the Indian hotel industry over the last few years. The balance sheets of hotel companies remained under stress in FY14 on account of acquisitions of land banks at unrealistically high prices in the past and the resultant rise in debt levels.

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 Prospects

In the long term, the demand-supply gap in India is very real and that there is need for more hotels in most cities. The shortage is especially true within the budget and the mid market segment. There is an urgent need for budget and mid market hotels in the country as travellers look for safe and affordable accommodation. Various domestic and international brands have made significant inroads into this space and more are expected to follow as the potential for this segment of hotels becomes more obvious. 

The United Nations World Tourism Organisation (UNWTO) expects growth to continue in 2014 at 4%, in line with UNWTO long term forecast. While Asia Pacific and America will lead the growth, Europe and Middle East are expected to remain under pressure. As per WTTC, the travel and tourism sector in India is forecasted to grow at a rate of 7.9% over the next decade. While key source markets of America and Europe are expected to continue to be the largest contributors to tourism, domestic short haul travel across Asia Pacific will remain a

growing trend, with Asia Pacific being a key growth driver for outbound tourism. 

The depreciation of the Indian rupee against the dollar is of great concern to almost every industrial and service sector in the Indian economy. However, India's current economic woes are good news for tourists. Whether it is foreign traveler arrivals or domestic tourism, India's tourism industry is experiencing a real boom. The rising value of the dollar against the rupee has made quite an impact on the foreign travel plans of many Indian holidaymakers, prompting them to switch to cheaper destinations to make their depreciated currency go further. As a result, domestic destinations like Goa and Agra are witnessing increasing interest. Anticipating an inbound travel upswing during the winter season, tourism stakeholders nationwide are excited about the prospects of a robust tourism revival. 

Safety and security issues must be understood with the context of tourism. In addition, safety has become a more prominent concern for tourists. Concerns about women’s safety remains of paramount importance. Safety and security are vital to providing high quality tourism. Hence, to promote tourism there should be sound law and order to assure tourists that they are safe.

13.) Media Sector Analysis ReportIndian media and entertainment industry is expected to grow at an annual average growth rate of 18% to touch Rs 2245 bn by 2017 (Source: CII-PwC 2013 report). The industry comprises of print, electronic, radio, internet and outdoor segments. With the government aggressively pushing in for digitization of TV, Multi System Cable Operators (MSOs) are expected to lose 15-20% of their subscribers to DTH (direct-to-home) services. Digitization will facilitate increased number of channels and high quality viewing. The Information and Broadcasting (I&B) ministry has already completed the second phase of digitization, which involved digitizing 16m cable TV houses in 38 cities during FY14. The growth trend for subscription revenues largely depends on the roll out of the Phase III and IV of digitization. The timely roll out of these phases is poised to substantially benefit the industry. 

The players in the electronic media can be classified into a three-link chain. First are the studios (including the animation studios), which comprise the hardware part of the industry, the second are the content providers and the third link comprises the distribution trolleys, which include the cable and satellite channels, multiplex theatres, MSOs and the DTH players. 

In India, the ratio of advertising expenditure to GDP is less than 1%. This is substantially lower in comparison to the developed economies as well

as other developing economies. Interestingly, Print and TV media contribute over 75% of the advertisement spend in a year. As the Indian economy continues to develop and the media reach increases, the advertising expenditure to GDP ratio is expected to increase over the next 5 years.

 Key Points

Supply Of the more than 70,000 newspapers printed in India, around 90% are published in Hindi and other vernacular languages. There are a total of 833 private satellite TV channels, permitted by the Information and Broadcasting Ministry, out of which 163 are pay channels. 

Demand The demand for regional print media is growing at a faster pace than that of English language print media. In the electronic media, the highly fragmented viewership has led to an increasing preference for niche channels.

Barriers to entry

In the electronic media, entry barriers are high for broadcasting since it is very capital-intensive. It involves the cost of leasing the transponder, setting up up-linking facilities, setting up pre and post-production facilities. The barriers to entry are far lower for content providers. Besides, broadcasters themselves commission programmes and finance their production. Hence margins are lower. In spite of the high barriers to entry a slew of channels across languages and genres have been launched in the recent past.

Bargaining power of suppliers

In the print media, it is high for newsprint suppliers. It is medium to low for content providers in the electronic media. Terrestrial broadcasters such as Doordarshan and regional broadcasters such as Sun TV actually commission time slots to content providers.

Bargaining power of customers

Relatively high in both print and electronic media. The consumer finds a surfeit of players to choose from. Conditional access system (CAS) and DTH services now enable the consumer to choose the channels that he wishes to view; thereby increasing his bargaining power.

Competition High in print media, especially in Hindi dailies. The print sector includes listed entities like Jagran Prakashan and HT Media. Regional print media too is seeing increasing competition. Competition is high amongst broadcasters especially for general entertainment channels. The space includes listed entities like Zee TV, TV 18, UTV, NDTV and Sun TV.

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 Financial Year '14

FY14 proved to be yet another tough year for the media industry. The delay in pick up in economic activity continued to impact advertisement spends. This impacted revenues of media companies as they derive a substantial chunk of their revenues from this segment. 

In the print space, efforts are being seen towards consolidation of business rather than aggressive expansions. The fall of rupee and its volatility during the year hurt the bottom line of the print

media companies as the cost of imported newsprint went up. 

The electronic media industry did mature to a considerable extent in FY14, especially after the roll-out of digitization Phase I and II during the year. The growth trend for subscription revenues largely depends on the roll out of the Phase III and IV of digitization. The timely roll out of these phases will certainly benefit the industry. Digitization deadline was further postponed on low availability of set top boxes. Phase III is expected to be completed in 2015 and Phase IV has to be finished in 2016.

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 Prospects

The fortunes of the media industry are linked to the growth of the economy. India is set to grow at a rate of at least 6-7% over the long term. Rising incomes in the hands of people encourage them to spend more on discretionary items like media and entertainment. However, the trend is shifting more towards the online medium. 

The demographic profile of India also favours higher spend on entertainment, with the consuming class forming a sizeable chunk of the country's total households. Thus, this could lead to the emergence of a huge consumer base for the various products and services (including entertainment). 

New distribution technologies like DTH, Conditional Access System (CAS) and IPTV, hold the future of the media industry as increasing digitization will radically alter the ways in which consumers receive channels. The mandatory digitization all over India will bring in more subscription revenues for the broadcasters as opposed to under reporting of numbers by cable operators at present. Also, continued growth of regional media and growing strength of the filmed entertainment sector will also boost growth of the media industry. 

The advent of digital platforms will require industry participants to invest in constant innovation in products and services. Thus, going forward, innovation will be the key to attract more consumers and deliver relevant content and services that are profitable too. 

With metros already being saturated, regional markets provide ample scope for growth in the media sector. In print media, newspapers are being published in vernacular language. In television, newer channels are introduced in local languages. Tier II and Tier III cities and towns are set to drive the Indian consumption story in the next few years. Television will continue to lead the media industry in terms of revenue contribution with 39%, followed by internet access with 28 %. While, the share of print and films are likely to decrease to 15% and 9% in 2017.

14.) Paints Sector Analysis ReportThe paint industry is expected to grow

at 12-13% annually over the next five years from Rs 280 bn in FY13 to around Rs 500 bn by FY18. FY14 was a challenging year for the industry as a whole due to subdued demand across key sectors and rising inflation. 

The unorganised sector controls around 35% of the paint market, with the organised sector accounting for the balance. In the unorganised segment, there are about 2,000 units having small and medium sized paint manufacturing plants. Top organised players include Asian Paints, Kansai Nerolac, Berger Paints and ICI. 

Demand for paints comes from two broad categories: 

Decoratives: Major segments in decoratives include exterior wall paints, interior wall paints, wood finishes and enamel and ancillary products such as primers, putties etc. Decorative paints account for over 77% of the overall paint market in India. Asian Paints is the market leader in this segment. Demand for decorative paints arises from household painting, architectural and other display purposes. Demand in the festive season (September-December) is significant, as compared to other periods. This segment is price sensitive and is a higher margin business as compared to industrial segment. 

Industrial: Three main segments of the industrial sector include automotive coatings, powder coatings and protective coatings. Kansai Nerolac is the market leader in this segment. User industries for industrial paints include automobiles engineering and consumer durables. The industrial paints segment is far more technology intensive than the decorative segment. 

The paints sector is raw material intensive, with over 300 raw materials (50% petro-based derivatives) involved in the manufacturing process. Since most of the raw materials are petroleum based, the industry benefits from softening crude prices.

 Key Points

Supply Supply exceeds demand in both the decorative as well as the industrial paints segments. Industry is fragmented.

Demand Demand for decorative paints depends on the housing sector and good monsoons. Industrial paint demand is linked to user industries like auto, engineering and consumer durables. 

Barriers to entry Brand, distribution network, working capital efficiency and technology play a

crucial role.

Bargaining power of suppliers

Price increase constrained with the presence of the unorganised sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is therefore that margins are better in the decorative segment.

Bargaining power of customers

High due to availability of wide choice.

Competition In both categories, companies in the organised sector focus on brand building. Higher pricing through product differentiation is also followed as a competitive strategy.

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 Financial Year '14

FY14 was tough for the Indian paint sector. Hopes of a revival in demand after a good monsoon and during the festive season were dashed by high inflation. The demand for paint, being a discretionary expenditure, is typically hurt during periods of rising inflation. However, to their surprise, paint makers have found that while demand remained tepid in cities, consumption was rising in rural areas. The increasing reach of media in villages has also helped paint makers, making easier for them to advertise their products in these regions. Companies have also discovered that demand for premium paints is high even in remote locations. 

Performance on the margins was impacted by the rising prices of crude oil and titanium dioxide which increased the overall expenditure, thereby impacting profitability growth. However, companies are undertaking a gradual and calibrated price increase in order to shield margins. Nonetheless, as a complete pass on of raw material price increase is not possible in the industrial segment, the blended margins continue to suffer. 

However, a good monsoon this year is expected to boost demand in the rural areas. A good harvest and festival season demand can boost volumes in the second half of FY15. 

All the key players are in an expansion phase. Asian Paints’ plant in Khandala, Maharashtra has recently got comissioned. Kansai Nerolac’s capacity expansion plans at Jainpur and Bawal has culminated. Berger Paints has also undertaken capacity expansion for its plants located in Andhra Pradesh (AP). Further, expansion of water based plant at Rishra and Goa is also on track. As per estimates, paint capacities are expected to go up by 50-70% in the coming 3 to 5 years.

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 Prospects

The market for paints in India is expected to grow at 1.5 times to 2 times GDP in the next five years. With GDP growth expected to be between 5-6% levels, the top three players are likely to clock above industry growth rates in the future, considering they have a strong brand and good reach. 

The market size of the paint industry in India is estimated at around Rs 290 bn. Industry players expect close to 12% growth in business volume and 10-12% rise in sales in FY15. 

Decorative paints segment is expected to witness higher growth going forward. The fiscal incentives given by the government to the housing sector have immensely benefited the housing sector. This will benefit key players in the long term. 

Although the demand for industrial paints is lukewarm it is expected to increase going forward. This is on account of increasing investments in infrastructure. Domestic and global auto majors have long term plans for the Indian market, which augur well for automotive paint manufacturers like Kansai Nerolac and Asian-PPG. Increased industrial paint demand, especially powder coatings and high performance coatings will also propel topline growth of paint majors in the medium term. 

If the new capacities do not get utilized well, companies may face margin pressures in the near term.

15.) Petrochemicals Sector Analysis Report

Petrochemicals are the derivatives of crude oil and natural gas. Olefins (ethylene, propylene & butadiene) and Aromatics (benzene, toluene & xylenes) are the major building blocks from which most Chemicals and Petrochemicals are produced. They are used in dyes, synthetic fibres, rubbers, plastics, pharmaceutical bulk drugs, industrial appliances, packaging industry, detergents (surfactants). 

Petrochemicals production process consists of primarily two stages. In the first stage naphtha, produced by refining, crude oil or natural gas is used as a feedstock and is cracked. Cracking (breaking of long chain of hydrocarbon molecule) produces olefins and aromatics. In stage two, these building blocks are polymerized (made to undergo chemical processes) to produce downstream petrochemical products (polymers, polyesters, fibre intermediaries and other industrial chemicals. The upstream integrated naphtha / gas cracker complexes are technology intensive and enjoy economy of scales. However, downstream plastic processing industry is quite fragmented across the country and operates at lower than optimum capacity. Some of the key players in this industry are Reliance Industries Ltd (RIL), Gas Authority of India Ltd (GAIL), and Indian Oil Corporation Ltd (IOCL) etc. 

Olefins are the key building blocks of the petrochemical industry. Of the main, while India has sufficient capacities for ethylene and propylene, styrene continues to be in deficit. Ethylene capacity grew in the five year plan due to partial de bottlenecking of capacity by GAIL, HPCL and the start-up of IOC complex at Panipat. Propylene production boosted due to extraction of Propylene by RIL at its Refinery Complex. For Butadiene, RIL and Haldia are the only two domestic producers. 

The industry suffers from high capital and energy costs, shortage of natural gas, lack of skilled manpower, low focus on value added exports of end products, cyclical nature of business, zero import duty differentials between polymers and feedstocks. 

The key demand drivers of this industry are GDP growth, improvement in disposable income, aspirations of young India, urbanization, etc. These megatrends get translated to increase demand for healthcare, packaging, white goods, automobiles, agri produce, retail, etc. The margins in the industry are cyclical and typically follow a 6-8 year period of troughs and peaks. 

The prices of petchem are determined on the basis of South East Asia (SEA) prices plus import duties. Due to relatively free imports and end prices being market driven, the domestic producers have to price their products in line with the prices prevailing in SEA region, irrespective of costs of production that leads to different margins for producers having different feedstocks. 

Important aspects of Petchem plant include Capital financing and feedstock tie-up. 

Availability and high duty on feedstock (natural gas), high cyclicality in the business, low import duties on polymers, poor margins due to nil duty differential between feed-stock and Products, large capex needed to set petchem projects (Petchem feedstocks face 5%customs duty) are some of the issues that the industry faces.

 Key Points

Supply So far India has worked towards self sufficiency in petrochemicals, which has been achieved.

Demand Demand of the petrochemicals generate from the downstream industries, which in turn are dependent on the state and growth of the economy which is facing a slowdown. 

Barriers to entry

The petrochemical industry is capital-intensive by nature. The minimum economic size of an integrated plant is around 1 million tonnes per annum, which in turn calls for huge investments.

Bargaining power of suppliers

Moderate to low despite the surplus naphtha production in the country. This is due to the fact that the suppliers are concentrated. However, with more and more integration happening for the oil refining companies, it should improve.

Bargaining power of customers

Moderate to low, the downstream user industry is fragmented, which reduces their collective bargaining power. Import duties on the products have declined significantly over the past and with additional capacities coming up in the Middle East the bargaining power of the customers might improve to an extent.

Competition Competition within the domestic market is limited, as there are only a handful of players with world-class capacities. However, due to low import duties, there is threat of imports from Middle East and the Asia Pacific region. Also, the refineries are getting integrated, which will reduce the industry concentration in terms of market share and in turn fuel competition. While India has opportunities to benefit from high labour costs in the developed economies, it faces a threat from GCC (gulf countries) countries that enjoy heavily subsidized feedstock that has also led to capacity expansions mainly for exports.

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 Financial Year '12

FY12 was marked by high feedstock prices and oversupply from Middle East. India remained a net importer of polymer products. 

The year witnessed the recovery of global markets from the oversupply of ethylene from Middle East and Asia. The global demand remained slow due to European crisis and stagnant Chinese demand. The global ethylene capacity grew by 3.6 MMT, while supply grew by 3.4 MMT. Global ethylene production totaled 125.6 MMT during the year (operating rate of 85.2% as compared to 84.9% in the previous year). Global ethylene prices were high due to higher crude oil and naphtha prices .However, Asian ethylene margins were under pressure as polyethylene prices did not increase in line with naphtha costs. During the year, 90% of capacity additions were from Middle East and Asia. Capacitywise, Middle East has a share of 18% while Asia’s share stands at 33%. 

In polymer segment, the consumption of global commodity plastics in FY 2011-12 was estimated at 205 MMT. The product price recovery of 4% to 10% was slower than the inflation of feedstock prices. 

The PVC consumption is India for FY12 is estimated to be 1.99 MMT, up 3%YoY. India imported about 747 KT (73 KT higher than FY 2010-11) of PVC. Pipes and fittings continued to be the major market accounting for 73% of the domestic PVC demand 

A total of 3.3 MMTA capacities were built for building blocks during the 11th plan period. (Actual production normally improves gradually). These additions, as mentioned earlier were by RIL, GAIL, and IOCL by way of new plants, or debottlenecking. 

During the 11th plan period (2007-12), the demand for olefins grew by 14% YoY. Partial debottlenecking by GAIL, start up of IOCL plants and propylene extraction by RIL increased building blocks production during the 11th plan period (achieved 8.7% CAGR) 

During FY06 to FY11 demand for synthetic rubber grew at an annual rate of 11.5% while the demand for natural rubber grew at CAGR of 3.4% and overall demand of rubber registered CAGR of 5.5% in the country. 

The current PTA capacity is 3850 KT and is projected to grow to 7130 KT by 2014-15. The demand has shown a consistent growth of 8-10% and future growth projections are 12-13% driven by downstream investments in Polyester capacities. 

Indian textile industry has been growing @ 11% per annum during the last five years. Maintaining this growth rate, the Indian textile industry is likely to reach a US$ 220 bn size by 2020.

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 Current scenario and prospects

Over the next 5 years, around 24.6 MMT are likely to be added to global ethylene capacity. More than 90% of the capacity expansions in PP and PE are likely to happen in Asia and Middle East. Around 82% of incremental capacity of PVC is expected to come up in Asia and the Middle East in the next five years. 

Among the domestic players, GAIL will be doubling up its petchem facility at PATA to produce 9 lac tonnes per annum (TPA) of polymers. It is also setting up a 2.8 lac TPA complex in Assam through ots subsidiary. Besides, GAIL will be a copromotor in OPAL (ONGC Petroadditions Ltd.) which is implementing a greenfield Petrochem complex of 1.4 TPA polymer capacity at Dahej, Gujarat. Mangalore Refinery (MRPL), a subsidiary of ONGC, has announced a new aromatics complex at Mangalore. The aromatics complex is expected to produce 275 KTA of benzene. Completion is delayed, and the start up is now expected in early 2013. 

By the end of the 12th Five year Plan, the demand for plastic processing machinery is projected to increase annually by 10.5% to 10,800 machine/ year with installed capacity of 50 MMTA. 

In 12th five year plan, overall capacity growth of 6.8% CAGR will be lower than demand growth of 10%. During 12th plan period new capacities are being planned and requirement of building blocks will go up from 6.4 MMT to 13.5 MMT(current capacity of 8.5 MMTA). IOCL and OPAL are adding butadiene capacities. RIL, ESSAR and OPAL are adding ethylene and propylene. Requirement of styrene will be met through imports only in 12th plan also as no new capacities are planned. 

As a result of under-developed trade and logistics infrastructure, the logistics cost of the Indian economy is over 13% of GDP, much higher than the cost in developed countries (less than 10%). Infrastructure in Petroleum, Chemicals and Petrochemical Investment Regions (PCPIR) will be critical in enhancing competitiveness of industry to be able to produce and distribute goods both for the domestic market and for exports.

16.) Pharmaceuticals Sector Analysis Report

The Indian Pharmaceutical market (IPM) is highly fragmented with about 24,000 players (330 in the organised sector). The top ten companies make up for more than a third of the market. The market is dominated majorly by branded generics which constitutes of nearly 70% to 80% of market. 

The IPM is valued at Rs 750 bn for the year ending March 2014.The growth in 2014 was subdued at 6% YoY vs 12% in 2013. The growth was impacted as the drug price control order (DPCO) issued notice to bring 348 drugs under price control. Despite this, the Indian pharma market remains one of the fastest growing pharma markets in the world. Currently the IPM is third largest in terms of volume and thirteen largest in terms of value. 

Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition. 

Introduction of GDUFA (Generic drug User Fee Act) in the US during July 2012 too had a negative impact on pharma companies. As per this Act, the generic companies are required to pay user fees to USFDA, for application of drugs and manufacturing facilities. This fee will be utilized by USFDA to engage additional resources in order to speed up the approval process. While the drug filling fees was applicable since some time, from Oct 2014 even plant inspection fees has come into effect. 

As the patent cliff is approaching, Indian pharma companies have increased their R&D expenses. The companies are spending more to establish niche product portfolios for the future. 

Consolidation has increasingly become an important feature of IPM. The recent deals viz; Sun pharma acquiring Ranbaxy, Wyeth and Pfizer merger, Strides selling its injectables arm and so on are the classic cases

 Key Points

Supply Higher for traditional therapeutic segments, this is typical of a developing market. Relatively lower for lifestyle segment.

Demand Very high for certain therapeutic segments. Will change as life expectancy, literacy increases.

Barriers to entry Licensing, distribution network, patents, plant approval by regulatory authority.

Bargaining power of suppliers

Distributors are increasingly pushing generic products in a bid to earn higher margins.

Bargaining power of buyers

High, a fragmented industry has ensured that there is widespread competition in almost all product segments. Currently, the domestic market is also protected by the DPCO.

Competition High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for large chunk of sales. Top 20 companies account for 60% of the IPM sales.

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 Financial Year '14

FY14/CY13 was challenging on the domestic front. The companies witnessed sluggish growth on the back of pricing policy. The companies faced strikes from the wholesales on margin issues due to reduction in prices of overall drugs. 

MNC pharma companies continued to witness subdued growth during FY14/CY13. It is important to note, the growth of the MNC players was below the domestic pharma companies. The pricing policy had a negative impact on the company's revenues. Over and above, these companies were also impacted by the increasing competition, drug launches by other companies before patent expiry, through compulsory licensing and patent infringements. Only couple of companies exhibited better growth. The margins of these companies remained subdued due to increasing expenses and slower top line growth. 

In the US, generic companies witnessed mixed growth. While some of the companies benefited from the low competition launches, others got impacted due to delay in approvals. Though there were not many blockbuster launches during the year, various companies did manage to display better growth. On the other hand, the companies witnessed growth pressures in several regions of Europe, Latin America and some other geographies due to increasing efforts by governments to reduce their healthcare burden and delay in approvals. 

Rupee depreciation was one important aspect which helped the industry especially those companies who had not hedged their receivables. 

The industry continued to face challenges on the regulatory front. During the year, there were few Indian companies that faced issues from the USFDA, as they lacked good manufacturing practices (GMP). Because of this, there were instances of import alerts being issued, drug recalls, warning letters and so on. The regulators have become more stringent now and have also been

conducting surprise checks.

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 Prospects

The IPM size is expected to grow to US$ 85 bn by 2020. The growth in Indian domestic market will be boosted by increasing consumer spending, rapid urbanization, increasing healthcare insurance and so on. 

The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle patterns. Going forward, better growth in domestic sales will depend on the ability of companies to align their product portfolio towards these chronic therapies as these diseases are on the rise. 

In various global markets, the government has been taking several cost effective measures in order to bring down healthcare expenses. Thus, governments are focusing on speedy introduction of generic drugs into the market. This too will benefit Indian pharma companies. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern. Over and above this, following GMP will be an important criteria for companies in order to grow in the global markets. 

For the US market, Indian companies are developing niche portfolios in various segments. High margin injectables, dermatology, respiratory, biogenerics, complex generics etc. have become an area of interest. Most of the Indian pharma companies have been working on these niche drugs in order to optimize growth and margins. Thus, post patent cliff, the companies which have developed their product basket in the niche category will be ahead in the curve. Moreover, generic penetration in the US is expected to peak out at 86-87% over the next couple of years from 83% currently.

17.) Power Sector Analysis ReportCoal shortages, scams, hike in prices of imported coal, lack of land availability, shortage in supply of equipments for new capacities and policy logjam have together paralyzed the prospects of power sector in India in the recent past. So much so that the sector that cornered a bulk of the five-year plan infrastructure outlays for decades, is now a forbidden one. Not just for investors but even for bankers and financers that a sector like power heavily relies upon. 

The key problems hindering the growth of the power sector are land, fuel, environment, and forest clearances. Even the government is finding it very difficult to get the required land for allotting to

power projects. One of the key problems in getting land is Naxalism in the eastern and central states, where a large number of projects are being planned owing to abundance of fuel resources. 

Central institutions like National Thermal Power Corporation Limited (NTPC) and the State Electricity Boards (SEBs) continue to dominate the power sector in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 68% of the total power generation capacity in India. This is followed by hydro-electricity (28% share). The rest comes from nuclear and wind energy. 

Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing and high pilferage. 

Losses of India’s State Electricity Boards have once again assumed disproportionate levels, thus coming full circle since the Electricity Act of 2003 which tried to make these entities more efficient. The average cost of supply for most discoms has far exceeded the average revenue realized.

 Key Points

Supply Many projects have been planned but due to slow regulatory processes and inadequate equipments and fuel, the supply is far lesser than demand. As per certain estimates, India needs to double its generation capacity over the next decade or so to meet the potential demand.

Demand The long-term average demand growth rate is expected to remain in the higher single digit growth levels given the lower per capita power consumption in india as compared to the global average.

Barriers to entry Barriers to entry are high, especially in the transmission and distribution segments, which are largely state monopolies. Also, entering the power generation business requires heavy investment initially. The other barriers are fuel linkages, payment guarantees from state governments that buy power and retail distribution license.

Bargaining power of suppliers

Not very high since the tariff structure is mainly regulated. 

Bargaining Bargaining power of retail customers is low, as power is in short supply. However

power of customers

government is a big buyer and payments from it can be erratic, as has been seen in the past.

Competition Getting intense, but despite there being enough room for many players, shortage of inputs such as coal and natural gas has dissuaded new entrants.

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 Financial Year '13

While average PLFs declined for all thermal power generation utilities across sectors, the Central Public Sector Undertakings continued to be the best performers, followed by private sector. SEBs and IPPs were the worst performers during FY13. Key reasons for the declining PLFs were shortage and poor quality of coal coupled with backing down of units and shutting down of units due to low demand from beneficiary states as well as delays in stabilisation of new plants. 

Energy deficit (difference between requirement and availability) numbers worsened during the year with the same standing at 8.7% (8.5% in FY12). Peak deficit numbers however improved on a year on year basis. 

As far as T&D segments of the sector are concerned, there was little that actually happened in FY13. The country continues to reel under the pressure of higher T&D losses (about 26%) and with the government going very slow with the reforms process in these segments, due to which the long-term sustainable growth of the sector seems doubtful. 

After the massive grid collapse in August in 2012, the problems of the transmission segment have resurfaced to government’s attention. Investments in this segment have, however, moved rather slowly. The existing inter-regional power transfer capacity stood at 27,750 MW at the end of the 11th Plan period. The same is targeted to increase to 65,550 MW by the end of the 12th Plan. The challenges that need to be addressed to meet this plan include right of way, flexibility in line loading and improvement of operational efficiency, amongst others. 

In order to ensure adequate supplies of coal and avoid stranded generating capacities in the country, the government issued a Presidential directive to CIL to sign Fuel Supply Agreements (FSAs) with power producers assuring them of at least 80% of the Annual Committed Quantity. However, CIL was unable to honour the 80% commitment on account of production shortfall.

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 Prospects

Recognising that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the industry has set itself the target of providing access to all households over the next few years. As per government reports, about one third of the households do not have access to electricity. Hence, meeting the target of providing universal access is a daunting task requiring significant addition to generation capacity and expansion of the transmission and distribution network. 

The target for power capacity addition during the 12th Plan period is 88,000 Mw. With about 60,000 Mw under execution, this 88 Gw should be achieved after hitting 55 Gw in the 11th Plan. The country added nearly 20 GW in FY13 - the first year of the plan. However, a significant amount of capacity is stranded owing to the non-availability of gas. Rising demand and falling domestic production has pushed the share of imported gas to 40% of the current consumption in India. The US has turned into a net energy exporter on the back of huge quantities of shale gas

and oil becoming available commercially. 

Import of coal in India is expected to rise up to 200 MMT (m metric tonnes) in the terminal year of the 12th Plan as availability of coal from domestic linkages would not suffice the requirements. 

Restoration of the financial health of state electricity boards (SEBs) and improvement in their operating performance continue to remain a critical issue for the sector. As such, effective implementation of the restructuring package remains the key. While the power distribution has been loss-making business in India on an overall basis, the investments in T&D are expected to improve with the privatization coming in.

18.) Retailing Sector Analysis ReportIndia is the 5th largest retail market in the world. The country ranks fourth among the surveyed 30 countries in terms of global retail development. The current market size of Indian retail industry is about US$ 520 bn (Source: IBEF). Retail growth of 14% to 15% per year is expected through 2015. By 2018, the Indian retail sector is likely to grow at a CAGR of 13% to reach a size of US$ 950 bn. Retailing has played a major role the world over in increasing productivity across a wide range of consumer goods and services. In the developed countries, the organised retail industry accounts for almost 80% of the total retail trade. In contrast, in India organised retail trade accounts for merely 8-10% of the total retail trade. This highlights a lot of scope for further penetration of organized retail in India. 

The sector can be broadly divided into two segments: Value retailing, which is typically a low margin-high volume business (primarily food and groceries) and Lifestyle retailing, a high margin-low volume business (apparel, footwear, etc). The sector is further divided into various categories, depending on the types of products offered. Food dominates market consumption with 60% share followed by fashion. The relatively low contribution of other categories indicates opportunity for organised retail growth in these segments, especially with India being one of the world's youngest markets. 

Transition from traditional retail to organised retail is taking place due to changing consumer expectations, growing middle class, higher disposable income, preference for luxury goods, and change in the demographic mix, etc. The

convenience of shopping with multiplicity of choice under one roof (Shop-in-Shop), and the increase of mall culture etc. are factors appreciated by the new generation. These factors are expected to drive organized retail growth in India over the long run.

 Key Points

Supply Players are now moving to Tier II and Tier III cities to increase penetration and explore untapped markets as Tier I cities have been explored enough and have reached a saturation level.

Demand Healthy economic growth, changing demographic profile, increasing disposable incomes, changing consumer tastes and preferences are some of the key factors that are driving and will continue to drive growth in the organised retail market in India.

Barriers to entry

Reforms by India in opening up its economy have greatly improved trade prospects, but major barriers still exist such as regulatory issues, supply chain complexities, inefficient infrastructure, and automatic approval not being allowed for foreign investment in retail. However, some of these issues may be tackled with allowance of FDI in single and multi-brand retail.

Bargaining power of suppliers

The bargaining power of suppliers varies depending upon the target segment, the format followed, and products on offer. The unorganised sector has a dominant position, still contributing about 90% to the total retail market. There are few players who enjoy an edge over others on account of being established players and enjoying brand distinction. Since it is a capital intensive industry, access to capital also plays an important part for expansion in the space.

Bargaining power of customers

High due to wide availability of choice. With FDI coming in, this is expected to become stronger.

Competition High. Competition is characterised by many factors, including assortment, products, price, quality, service, location, reputation, credit and availability of retail space etc. New entrants (business houses and international players) including foreign players are expected to further intensify the competition.

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 Financial Year '14

During FY14, the economic backdrop was a key factor impacting the performance of retail companies across various sub sectors, including that of organized retail. Consumer sentiment and business confidence continued to be subdued during the year with economic growth decelerating further. This is attributable mainly to weakening industrial growth in the context of tight monetary policy followed by the RBI through most of the year, political & policy stability related concerns and uncertainty in the global economy. 

Inflation also was an important concern area. Persistent high inflation and inflation expectations meant that the RBI was compelled to maintain the benchmark interest rates at a much higher level

than what would be needed to encourage business and economic sentiment. In the recent quarters consumer sentiment has been varied-with apparel retailers reporting an improving trend but most other retail formats still witnessing muted off take.

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 Prospects

Retail industry has been on a growth trajectory over the past few years. The industry is expected to be worth US$ 1.3 trillion by 2020. Of this, organized retail is expected to grow at a rate of 25% p.a. A significant new trend emerging in retail sector is the increase in sales during discount seasons. It has been observed of late that sales numbers in discount seasons are significantly higher than at other times. This is prompting retailers to start discounts earlier and have longer than usual sale season. Also, concepts such as online retailing and direct selling are becoming increasingly popular in India thereby boosting growth of retail sector. 

Another crucial structural change is expected to come in the form of implementation of FDI in multi-brand retail. The industry players are strongly in favour of entry of foreign retailers into the country. This will help them in funding their operations and expansion plans. The expertise and experience brought in by the foreign retailers will also improve the way the Indian retailers operate. It is expected to bring in more efficiency in the supply chain functions of retailers. 

However, fear of loss of business for kiranawalas is still a cause of concern and is posing hurdles in FDI implementation across country. Ironically, even though it has been some time since the government opened the door for FDI in multi-brand retail, international retailers have not yet shown wholehearted interest in coming to India yet. Hurdles such as requirement of clearance from individual states, mandate of 30% local outsourcing of materials from micro and small enterprises are keeping the investors away from India. 

Retail is mainly a volume game, (especially value retailing). Going forward, with the competition intensifying and the costs scaling up, the players who are able to cater to the needs of the consumers and grow volumes by ensuring footfalls will have a competitive advantage. At the same time competition, high real estate cost, scarcity of skilled manpower and lack of infrastructure are some of the hurdles yet to be tackled fully by retailers. 

Luxury retailing is gaining importance in India. This includes fragrances, gourmet retailing, accessories, and jewellery among many others. The Indian consumer is ready to splurge on luxury items and is increasingly doing so. The Indian luxury market is expected to grow at a rate of 25% per annum. This will make India the 12th largest luxury retail market in the world. 

Rural retailing is another area of prime focus for many retailers. Rural India accounts for 2/5th of the total consumption in India. Thus, the industry players do not want to be left out and are devising strategies especially for the rural consumer. However, players should be ready to face some imminent challenges in rural area. For instance, competition from local mom and pop stores as they sell on credit, logistics hurdles due to bad infrastructure in rural areas, higher inventory expenses and different buying preferences amongst rural population.

19.) Shipping Sector Analysis ReportShipping is a global industry and its prospects are closely tied to the level of economic

activity in the world. A higher level of economic growth would generally lead to higher demand for industrial raw materials, which in turn will boost imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be volatile. 

Freight rates and earnings of the shipping companies are primarily a function of demand and supply in the markets. While demand drivers are a function of trade growth and geographical balance of trade (which determines the length of haul required), the supply drivers are a function of new ship building orders as well as scrapping of existing tonnage. 

The global shipping industry can be broadly classified into wet bulk (like crude and petroleum products), dry bulk (like iron ore and coal) and liners. Under liners, it has containers, MPP and Ro-Ros types of vessels. There are various benchmarks that determine freight rates for these segments. The prominent amongst them are Baltic Freight Index, Baltic Handymax Index (for dry bulk segment) and World Scale (for tankers).

 Key Points

Supply Determined by the addition to shipping capacity

Demand Closely related to growth in world trade.

Barriers to entry Highly capital intensive and adequate cash flows required for funding working capital requirements. Moreover, expertise and technical know-how are critical factors.

Bargaining power of suppliers

Diminishing with gradual increase in fleet supply and intense global competition.

Bargaining power of customers

High bargaining power as competition is high in the industry.

Competition Competition is price based. However, companies with younger fleet command a premium.

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 Financial Year '12

Freight rates in the tanker market ended the year at nearly the same level at which it started. This was due to adverse conditions prevailing in both demand as well as supply side. On the supply side, lower rate of scrapping and new fleet additions put pressure on freight rates. While on the demand side, lower economic growth in OECD countries and closure of some refineries in the developed west put additional pressure on rates. Although there were spurts witnessed in

between, steady addition of new fleet quelled any hopes of a robust ending to the year in the terms of freight rates. World tanker fleet is believed to increase to 480 m dwt at the end of the year, a 5% increase from the previous year. 

The dry bulk business fared even worse what with freight rates ending lower than the level at which it started the fiscal. This was on account of new building deliveries, which affected capacity utilisation, a significant deal. Although there was increased Chinese coastal trade and prolonged congestions, the relentless addition to fleet did not allow any improvement in the freight rates. World dry bulk fleet increased 15% over FY11 and stood at over 630 m dwt.

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 Prospects

Global economic growth is likely to remain weak in the near to medium term. This, along with high crude oil prices will impact the tanker market negatively. Another concern is the tension in the Middle East and if the same aggravates, then there will be a significant change in trade dynamics. One good news is that the financial distress owing to weak economy could increase the speed of scrappage, thus supporting freight rates 

For the dry bulk market however, fleet additions is likely to outpace scrappages, thus putting downward pressure on freight rates. Then there is the risk of a prolonged slowdown in China and also in Europe which will further prevent the rates from rising. 

The increase in India's refining capacity and a pick-up in oil exploration activity globally will benefit the offshore shipping lines as demand for their services picks up. As a result of the commissioning of large domestic refining capacities, the import of crude is expected to jump in the future. This would benefit shipping majors.

20.) Software Sector Analysis ReportGlobal IT spending, which picked up in CY13, is expected to maintain a decent growth in CY14 as the economic situation in the US and Europe continues to improve. Discretionary spending on IT budgets by large global corporations has ticked up compared to last year but is limited to the new digital technologies. In terms of industry verticals, Banking, Financial Services and Insurance (BFSI) and Energy are the growth drivers. 

Indian IT companies had a good year in terms of financial performance, driven by factors like such as the improvement in the quality of service offerings, stable pricing environment and the depreciation of the Indian rupee. Indian IT firms continue to move up the value chain by providing more end-to-end solutions and engaging more closely with clients. They are also increasingly relying on internal cost

optimisation measures to improve profitability. 

India's IT industry can be divided into five main components, viz. Software Products, IT services, Engineering and R&D services, ITES/BPO (IT-enabled services/Business Process Outsourcing) and Hardware. Export revenues, primarily on project based IT Services continue to drive growth with IT Services. This accounts for 54.2% of total revenues followed by BPO and Engineering services at 19.5%, Software Products at 15.3% and hardware at 11%. Multi-year annuity based outsourcing agreements continue to increase at a steady rate. In terms of total export and domestic revenues, Application Development and Maintenance (ADM) still continue to be the bread and butter for Indian IT companies; however traditional services have become increasingly commoditised. 

Labour arbitrage has been the competitive edge of the Indian software sector over the last few years. However, the focus has now shifted to providing value to clients beyond cost savings. Software services are being increasingly demanded by global MNCs which can boost sales as well as improve internal efficiency. 

Increasing competition, pressure on billing rates of traditional services and increasing commoditization of lower-end services are among the key reasons forcing the Indian software industry to make a fast move up in the software value chain. The companies are now providing higher value-added services like consulting, product development, R&D as well as new digital technologies like social media, mobility, analytics, and cloud computing (SMAC). 

The new Indian government is emphasizing on better technology enabled delivery mechanisms for a multitude of government projects. Further, with the new digital India initiative being launched, the domestic market for software services looks forward to a bright future.

 Key Points

Supply Abundant supply across segments, mainly lower-end, such as ADM. Lower supply in higher-end areas like IT/Business Consulting, but competition is very tough.

Demand The global downturn had put considerable pressure on global IT spending but

the situation is now improving.

Barriers to entry Low, particularly in the ADM & BPO segments as these are prone to relatively easy commoditization. It's high in value-added services like IT/Business Consulting and R&D where in-domain expertise creates a barrier. The size of a particular company/scalability and brand-image also creates barriers to entry; as such firms have built up long-term relationships with major clients.

Competition Competition is global in nature and stretches across boundaries and geographies. It is expected to intensify due to the attempted replication of the Indian offshoring model by MNC IT majors as well as small startups.

Substitution of IT services and products

IT continues to be a driving force towards all aspects connected with our lives. While a particular technology may become obsolete and a particular company specializing in it may suffer, the obsolete technology can only get substituted by a newer technology offered by the same/different player in the IT/ITES industry.

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 Financial Year '14

The Indian IT/ITES industry earned revenue of over US$ 109 bn during FY14. Out of this, exports accounted for 69.7% of the industry's revenue. 

In terms of growth by industry verticals, BFSI, Telecom, Manufacturing and all emerging verticals are expected to grow at 14%, 9%, 14% and greater than 14% respectively. 

The USA accounts for about 53% of the export revenue followed by the UK and Continental Europe, with 15% and 10% respectively. Other regions such as Asia Pacific are catching up, with a contribution of 6.5%. 

At the end of FY14, India's share in the global outsourcing market stood at 55%.

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 Prospects

As per NASSCOM, the Indian IT/ITES industry is expected to maintain a growth of 13-15% in FY2015. NASSCOM has also envisaged the Indian IT/ITES industry to achieve a revenue target of USD 225 bn by 2020 for which the industry needs to grow by about 13% on a YoY basis in the next six years. 

Technology research firm Gartner, expects global IT services spending to grow marginally by 4.2% in CY2014 to cross US$ 3,749 bn. As the global sourcing industry continues to grow and as Indian IT companies continue to increase market share, outlook for the sector remains robust. 

Emerging protectionist policies in the developed world are expected to affect the Indian IT companies. Due to US restrictions on visas as well as rising visa costs, most Indian IT companies are increasingly subcontracting onsite jobs to local employees in the US. Additionally, the new immigration bill is still under consideration in the US which, if implemented, will significantly raise employee costs for onsite workers. This would adversely affect margins of Indian IT companies. 

Indian IT companies are increasingly adopting the global delivery model. They are setting up

development centers in Latin America, South East Asia and Eastern European countries to take advantage of low cost and also cater to the local market. In the US, such centers will help mitigate the risks of the new immigration bill and increase the probability of winning projects in highly regulated sectors such as healthcare, government services, utilities etc. 

ADM services, which used to provide major chunk of revenues to the domestic IT players, are getting affected due to the falling billing rates. Hence, the companies are now venturing into new high value services such as IT Consulting, Product Development, and the new digital SMAC services. 

The integration of IT-BPO contracts is expected to become more common, as clients look out for end-to-end service providers. Large Indian companies like Infosys, TCS, Wipro, Tech Mahindra and HCL Technologies, will benefit from this trend. 

Billing rates are expected to remain under pressure in the short term. Therefore companies are expected to preserve their margins through effective cost containment measures like shifting more wore work offshore and improving employee utilisation. Lessons learnt during the global financial crisis can benefit them in the long run. 

Billing rates are expected to remain under pressure due to commoditization of traditional services. Therefore companies are expected to preserve their margins through effective cost containment measures like shifting more wore work offshore, improving employee utilisation and the increasing use of automation software.

21.) Steel Sector Analysis ReportThe Indian steel industry continued to showcase trends of higher consumption of finished steel. Currently, the steel consumption in India is second only to China. However, with the steel consumption in China expected to moderate at around 3%, India is likely to emerge as the fastest growing steel consuming nation. Further, India's current per capita finished steel consumption at 52 kg is well below the world average of 203 kg. With rising income levels expected to make steel increasingly affordable, there is vast scope for increasing per capita consumption of steel. 

Being a core sector, steel industry tracks the overall economic growth in the long term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries. The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Iron ore is also available in abundant quantities. This provides

major cost advantage to the domestic steel industry. 

The Indian steel industry is largely iron-based through the blast furnace (BF) or the direct reduced iron (DRI) route. Indian steel industry is highly consolidated. About 60% of the crude steel capacity is resident with integrated steel producers (ISP). But the changing ratio of hot metal to crude steel production indicates the increasing presence of secondary steel producers (non integrated steel producers) manufacturing steel through scrap route, enhancing their dependence on imported raw material.

 Key Points

Supply With trade barriers having been lowered over the years, imports play an important role in the domestic markets.

Demand The demand is derived from sectors that include infrastructure, consumer durables and automobiles. 

Barriers to entry High capital costs, technology, economies of scale, government policy.

Bargaining power of suppliers

Low for fully integrated players who have their own mines for raw materials. High, for non integrated players who have to depend on outside suppliers for sourcing raw materials.

Bargaining power of customers

High, presence of a large number of suppliers and access to global markets.

Competition High, presence of a large number of players in the unorganized sector.

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 Financial Year '14

The world Gross Domestic Product (GDP) is expected to grow by 3.4% in 2014. With advanced economies expected to do well in 2015, the global growth projection for 2015 is 5%. (Source:- IMF & SAIL annual report) This is despite the fact that there was a noticeable slowdown in the emerging market and developing economies during 2013, a reflection of the sharp deceleration in demand from key advanced economies. As such, we reckon that while global prospects have improved but the road to recovery in the advanced economies is still uncertain and volatile. 

World crude steel production grew at 3% reaching 1,606 MT in 2013, as per World Steel Association (WSA). The growth in production is coming mainly from Asia, as the crude steel production in all other regions (except Africa) declined in 2013. China's crude steel production increased 6.6% YoY to 779 MT in 2013. However, the EU recorded a negative growth of 1.8% compared to 2012.

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 Prospects

The Indian metals and mining sector is currently facing a multitude of challenges like weak macro environment, leveraged balance sheets and heightened regulatory risks. The sector has suffered valuation de-rating since FY12 due to various factors like environmental and regulatory concerns, cost increases, delayed projects and high interest rates. 

Government delays in allocating coal blocks for captive consumption by steel manufacturers seriously hurt the competitive edge of the Indian steel sector. Same was the story with iron ore. There are delays in allocating iron ore mines as well as approval for mining licenses. As a result, no new investment in the steel sector is happening to add new steel capacities. 

There are trends of demand recovery in the property sector and the demand for infrastructure has also been strong since the Modi government came to power. However, underlying demand in the EU is not expected to improve much in 2014. Overall, steel demand is expected to remain weak due to the continuing economic crisis in the developed countries and the structural shift in the Chinese economy. Moreover the world is reeling under the pressure of large surplus capacity which will remain a serious cause of concern, especially in times of subdued global demand. 

GDP growth in India stood in the region of sub 5% in FY14 on account of stalled investment against the backdrop of tightening policies, widening trade and fiscal deficit, high inflation and weak FDI inflows. Further, FY14 was also a year of subdued activity for steel using sectors in particular the auto segment. It is expected that the next fiscal will continue to remain a challenging year for the automotive sector if interest rates remain high. However, decline in fuel expenses (which has been the case recently) may help a bit. 

Steel demand in India has remained sluggish so far in 2014 amidst weak activity and poor sentiment; however, activity is expected to accelerate modestly in the coming years. Strengthening domestic consumption and improving external conditions will help underpin the growth of steel using sectors.

22.) Telecom Sector Analysis ReportIndia's teledensity has improved from under 4% in March 2001 to around 75.23% by the end of March 2014. Cellular telephony continues to be the fastest growing segment in the Indian telecom industry. The mobile subscriber base (GSM and CDMA combined) has grown from under 2 m at the end of FY00 to touch almost 932 m at the end of March 2014. Tariff reduction and decline in handset costs has helped the segment to gain in scale. The cellular segment is playing an important role in the industry by making itself available in the rural and semi urban areas where teledensity is the lowest. 

The fixed line segment continues to decline in terms of the subscriber base. It has declined to

28.59 m subscribers in March 2014 from 30.21 m in March 2013. The decline was mainly due to substitution of landlines with mobile phones. 

As far as wireless broadband connections (>=512 kbps) are concerned, India currently has a subscriber base of about 43.2 m. Broadband penetration received a boost from the auction of broadband spectrum. The contribution of data to revenues continues to grow steadily for all leading telcos. This bodes well for the future of broadband services. Consumption of data services is growing at an exponential pace.

 Key Points

Supply Intense competition has resulted in prompt service to the subscribers.

Demand Given the low tariff environment and relatively low rural and semi urban penetration levels, demand will continue to remain higher in the foreseeable future across all the segments.

Barriers to entry High capital investments, well-established players who have a nationwide network, license fee, continuously evolving technology and lowest tariffs in the world.

Bargaining power of suppliers

Improved competitive scenario and commoditisation of telecom services has led to reduced bargaining power for services providers.

Bargaining power of customers

A wide variety of choices available to customers both in fixed as well as mobile telephony has resulted in increased bargaining power for the customers.

Competition Competition has intensified with the entry of new cellular players in circles. Reduced tariffs have hurt all operators.

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 Financial Year '14

After the fall in mobile subscriber base in FY13 due to the cancellation of spectrum licenses of

some of the operators in February 2012, the sector bounced back by adding about 60 m wireless

subscribers in FY14. At the end of March 2014, the country’s total telecom subscriber base (fixed

plus mobile) stood at about 931.95 m. The tele-density level stood at about 75.23% by the end of

the fiscal. 

Data source: Trai, Company Data Data source: Trai, Company Data

In February 2014, the government concluded the auction process for 900 and 1,800 MHz spectrum. Out of the 431.2 MHz that was put up for auction, 353.2 MHz was sold for a consideration of Rs 611.622 bn. 

During FY14, the Indian government issued new merger and acquisition (M&A) norms as well as fixed the uniform license fee at 8% of adjusted gross revenue (AGR) for all telcos for the unified license.

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 Prospects

The fixed line business continues to remain muted despite the low penetration levels in the country. The increasing demand for data based services such as the Internet will act as major catalysts in the growth of this segment. However, the growth continues to be mitigated by increasing substitution of landlines by mobile phone. The PSUs will however continue to retain their dominant position. This is on account of high capital investments required in setting up a nationwide network. 

Increasing choice and one of the lowest tariffs in the world have made the cellular services in India an attractive proposition for the average consumer. The teledensity in urban areas is nearly 150%. Therefore the main driver for future growth would be the rural areas where wireless tele-density is around 43.67%. . 

After a failure of not one but two rounds of spectrum auction, the government finally concluded the auction process for 900 and 1,800 MHz spectrum. Out of the 431.2 MHz that was put up for auction, 353.2 MHz was sold for a consideration of Rs 611.622 bn. The operators are still in need of spectrum for their 3G roll out plans. In addition to this the prices for the upcoming license renewal would also be decided on the basis of the auction price. Therefore the operators are keen that the reserve prices of 2G and 3G spectrum be kept as low as possible. However, whether this happens or not, remains to be seen. 

The operator’s margins improved during FY14. Due to reducing competition, tariffs remained stable. The operators continued to see better realizations. This is more a function of the elimination and cutting down of subscriber related costs rather and free promotional offers than an increase in tariffs. Therefore there has not been any adverse impact on usage despite better realized rates. Rationalization of costs and tariffs is expected to continue in the current fiscal as well. This will be aided by good growth in the rural and semi-urban customer base. 

Balance sheets of operators continue to remain under pressure. Operators took a lot of debt in the process of shoring up funds for the license renewals and payments of one time fees. The incumbents Bharti Airtel and Idea Cellular have raised money through stake sales and qualified

placements respectively and in the case of Bharti, the sale of its tower assets in Africa.

23.) Textiles Sector Analysis ReportAs per the Ministry of Textiles, the Indian textile industry contributed about 14% to industrial production, 4% to the country’s GDP and 17% to the country’s export earnings in 2013. It provides direct employment to over 35 m people and is the second largest provider of employment after agriculture. 

According to the Ministry of Textiles, the domestic textile and apparel industry in India is estimated to reach US$ 141 bn by 2021 from US$ 58 bn in 2011. Apparel exports from India is expected to increase to US$ 82 bn by 2021 from US$ 31 bn in 2011. Total cloth production in India is expected to grow to 112 bn square metres by FY17 from 62 bn square metres in FY11. 

India enjoys a significant lead in terms of labour cost per hour over developed countries like US and newly industrialised economies like Hong Kong, Taiwan, South Korea and China. As per data from National Bureau of Statistics, due to steep wage inflation, the average wage cost in China stood at US$ 450 per month in 2012 as against US$ 200 per month in India. Also, India is rich in traditional workers adept at value-adding tasks, which could give Indian companies significant margin advantage. However, India's inflexible labor laws have been a hindrance to investments in this segment. Unlike in home textiles, garment capacities are highly fragmented and leading Indian textile companies have been slow to ramp up their apparel capacities, despite strong order flows from overseas buyers who are trying to diversify out of China. 

The textile industry aims to double its workforce over the next 3 years. As a thumb rule, for every Rs1 lac invested in the industry, an average of 7 additional jobs is created.

 Key Points

Supply Despite some pick-up in demand from both global and domestic markets, most new capacities in the apparel and home textile segments are not operating at full capacities.

Demand High for premium and branded products due to increasing per capita disposable income.

Barriers to entry Superior technology, skilled and unskilled labour, distribution network, access to global customers

Bargaining power of suppliers

Because of over supply in the unorganised market like that of denim, suppliers have little bargaining power. However, premium products and branded players continue to garner higher margins.

Bargaining power of customers

Domestic customers - Low for premium and branded product segments. Global customers- High due to presence of alternate low cost sourcing destinations 

Competition High. Very fragmented industry. Competition from other low cost producing nations is likely to intensify.

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 Financial Year '14

Textile exports did remarkably well in an otherwise dull exports scenario in FY14. A weaker rupee and firm overseas demand helped the sector add US$ 4 bn to overall exports of US$ 312 bn, second only to engineering goods. Readymade garments, which accounts for nearly half of all textile exports at US$ 14.9 bn, grew 15.5%. Cotton yarn and fabrics grew 18% to US$ 8.9 bn, while manmade textiles grew nearly 13% to US$5.7 bn. 

Most companies in the sector timed their expansion plans FY04 onwards, so as to avail themselves of the funding under TUF (Technology Upgradation Fund, offering loans at 6% subsidy). This led to the capex-spending phase in the textile sector peaking in the last three fiscals. However, with the slump in demand for textile products from the overseas markets, a number of companies had to defer their expansion plans due to large under-utilised capacities.

Relatively lower cost of cotton helped the margins of export dependant textile industry in the second half of FY14. However, since these trends are temporary in nature, pressure on margins could increase the debt levels for players in the sector.

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 Prospects

Textile exports in FY15 are expected to grow by 25% to US$ 50 bn. Incremental capital investments in debt reliant textile industry could, however, remain subdued given banks’ unwillingness to lend to the sector and higher cost of funds. 

A slew of measures have been recommended for reforms in labour laws particularly for textile sector pending lengthy legislative amendments of labour laws. 

Improving capacity use across the textile value chain is driven by a pick-up in both export and domestic demand as reflected in a healthy order book. Although the Indian government has reduced interest subsidy benefits to standalone spinning projects to 2% from earlier 4%-5%, capex could be imminent in weaving, processing and garmenting segments. This is in view of the improved sector outlook, near full use of existing capacities and continued subsidy benefits under

the Revised Restructured Technology Upgradation Fund Scheme notified in October 2013.. 

India and China are currently competing in the same categories (premium segment) of apparels and home textiles and given India’s established presence in the high end segment, India could gain significant market share in US apparel imports. However, the ongoing economic slowdown in the US could result in lower orders from US retailers that, in turn, may result in lower capacity utilisation and impact profitability of textile companies in India. 

As per the 12th Five Year Plan, the Integrated Skill Development Scheme aims to train over 2,675,000 people within the next 5 years (this would cover over 270,000 people during the first two years and the rest during the remaining three years). This scheme would cover all sub-sectors of the textile sector, such as textiles and apparel, handicrafts, handlooms, jute and sericulture.